Does an Overdraft Affect Your Credit Score?

An overdraft occurs when a person withdraws money or makes a transaction that results in an overdraft or overdrawn account. When an overdraft occurs, your bank may either transfer money from a linked account to cover the overdraft amount or your account can show a negative balance. So, you might be wondering whether an overdraft can affect your credit score? We will explain the answer to this question in much detail below.

Does an Overdraft Affect Your Credit Score?

An overdraft does not affect your credit score because the status of your checking account is not reported to the credit reporting bureaus. However, if you have a checking or savings account that is overdrawn and you leave it overdrawn for a long period of time, the amount of money that you owe on the account (debt) may be sold to a collections agency. The collection agency may then cause damage to your credit and credit score by adding a collection account to your credit report.

If a collection account is added to your credit report, it will remain on it for 7 years from the date your account became overdrawn.

So, although merely having an overdraft will never directly affect your credit, if the negative balance is sold to a collection agency, the collection agency can cause damage to your credit when attempting to collect the overdrawn amount from you.

A single collection account can lower your credit score by up to 100 points. So, if you have an overdraft that causes a negative balance, contact your bank and repay the money because if you do not, you risk the overdrawn amount to be sold to collections.

Does Your Checking or Savings Account Appear On Your Credit Report?

No, your checking and savings account statuses are not reported to the credit reporting bureaus and so they do not appear on your credit report. Credit cards accounts, on the other hand, are reported to the credit reporting bureaus. Credit cards are reported to the credit reporting bureaus to keep track of how well you borrow and repay money, since you’re not borrowing money when you use your debit card or your checking account, its status is not reported to the credit reporting bureaus.

That said, there is a system that monitors checking accounts to ensure that consumers are not abusing their checking accounts and this system is known as ChexSystem. You can head over to their website right now and request a consumer report, this report will show any derogatory information that relates to your checking account, as well as any recent accounts that you’ve opened.

Some of the information that you can expect to find with a ChexSystem report includes: checking account overdrafts, checking accounts with a negative balance, bounced checks, as well as involuntary account closures.

So, although your checking account does not appear on your credit report, if you have abused your checking account in the past, banks may refuse to open an account for you if negative information has been reported to Chexsystem.

How To Avoid Having an Overdraft Hurting Your Credit Score?

To avoid leaving an account with a negative balance that may be sold to collections and therefore affect your credit score, you should set up overdraft protection. Almost every bank that we have ever dealt with has some form of overdraft protection, which will transfer money from your savings account or another checking out that you may have to cover a transaction from an account that has insufficient funds. That said, your bank may charge you a fee every time your account becomes overdrawn, but it ensures that your transaction goes through.

Here is What Does Affect Your Credit Score

The credit reporting bureaus explicitly state the following factors affect your credit score:

  1. Payment History – Your payment history accounts for 35% of your credit score. Your payment history includes paying things, such as your credit cards and loans. If you pay your accounts on time, you will improve your credit score. However, missing even a single payment on a credit card or loan will cause significant damage to your credit score. That said, checking and savings accounts are not reported to the credit reporting bureaus, so having an overdraft on your account will not affect your credit score.

  2. Credit utilization – Your credit utilization is the second most important factor affecting your credit score, accounting for 30% of your credit score. Credit utilization refers to the amount of available credit that you have when compared to your account balances. As a rule of thumb, you want to keep your credit utilization between 5% and 10% but never exceed 30%. So, if you want to improve your credit score and have this factor positively affect your credit score, you should reduce the balances on your accounts.

  3. Mix of Credit – The diversity of your credit accounts, known as your credit mix, accounts for 15% of your credit score. So, if you want this factor to positively affect your credit score, you should diversify the type of accounts that you have, such as credit cards, auto loans, student loans, or home mortgage. The more diverse your accounts, the better your credit score will be.

  4. Hard Inquiries – The number of hard inquiries that you have on your credit report will affect your credit score. The credit reporting bureaus ding you every time you apply for a new credit card or loan by placing a hard inquiry on your credit report. Although a single hard inquiry will not lower your credit score by much, having several hard inquiries within a short period of time can significantly negatively affect your credit and raise red flags to future lenders and creditors.

Credit Score Planet Frequently Asked Questions

1. Do overdrafts affect your credit?

Although overdrafts do not directly affect your credit score, leaving an account with an overdraft for a very long period of time may cause your bank to sell the debt that you owe to a collection agency, which can then cause damage to your credit.

2. How long can you stay in overdraft for?

The answer to this questions depends on your bank. Every bank allows its customers to keep their accounts overdrawn for different periods of time. That said, don’t allow your account to remain overdrawn for a length time period because you may cause damage to your credit score if the negative balance is sold to a collection agency.

3. What is the average overdraft limit?

Usually, the allowable overdraft limit ranges from $100 to $1000. This limit is different from one bank to another, and even within the same bank, different customers may have different limit based on their history with the bank.

4. What happens if I can’t pay my overdraft?

If you do not pay an overdraft (negative balance) on your checking or savings account, the bank can charge you fees, close your accounts, and sell your negative balance to a collection agency that will then come after you to recover the unpaid amount for the bank. In the process of collecting the negative balance, the collection agency can hurt your credit by adding a collection account to your credit report.