Overdrafts don’t show up on your credit report, but they can still impact your score. Here’s what you need to know.
Bouncing a check or having your debit card declined is no fun, but it typically won’t affect your credit score. Your credit reports show your record using credit. Since you’re not using credit when you write a check or use your debit card, banks do not report this information to the credit bureaus. But that doesn’t mean there won’t be any financial or credit repercussions.
If you overdraw your account, your bank or credit union may charge you a fee – and sometimes it can be substantial. If your balance falls below zero, the transaction might be denied, and it could trigger a non-sufficient funds (NSF) fee.You can opt into overdraft protection, linking your checking account to a savings account or line of credit to cover the cost of any charges that would cause you to overdraw your account. It will also keep you from having transactions declined. This will keep you from any potential embarrassment, but you could still face an overdraft fee, though it will likely be less than the fee for accounts without overdraft protection.
How could this impact your score?
Since the overdraft itself does not appear on your credit report, it will also not affect your credit score. But there are some scenarios where it could impact your score. If an overdraft causes you to miss a payment that ultimately goes to collections, that will show up on your credit report and have an adverse effect.
If you have overdraft protection tied to a line of credit, that credit line might be reported on your credit report. But what shows up on your credit report is simply that the line was accessed, not what it was for. This could help your score in two ways: increasing your credit mix, which is worth 10% of your credit score, and reporting on-time payments, which is worth 35% of your score. Not all banks report overdraft lines to the bureaus, so be sure to ask if yours does.
It can further complicate matters if you’re using a product like UltraFICO or Experian Boost to boost your credit score. If you opt in to UltraFICO, it supplements your credit score using information like how much you have in savings, how long your accounts have been open and how active these accounts are. If you show a negative account balance, this could impact your UltraFICO score.
Experian Boost, on the other hand, allows you to self-report positive payment activities. While missed payments and overdrafts won’t show up, you won’t see the same results as you would with a long history of positive payments.
Will it impact your ability to sign up for a credit card or other loan?
Assuming that an overdraft doesn’t send a bill into collections or impact any alternative data, you will likely still be able to get a credit card or loan. But if overdrafting is a chronic issue, it might show up on your credit report in other ways.
For instance, if you write a check to pay a bill and that check is declined by your bank, you could be late making your payment and you may also have to pay a late fee, interest and possibly an NSF fee. Depending on the timing, the missed payment caused by the bounced check could show up on your credit report. And if all of this happens when you are about to sign up for a credit card or finance a large purchase, you might find that the terms you qualify for are less than ideal. You might even be denied completely.
Can your bank close your account due to overdrafts?
If you overdraft frequently, your bank could close your account. Beyond making it more challenging to pay bills, it could also keep you from opening a new account at a new bank. Many banks report account closures to companies that track banking history, much like credit bureaus track credit history. ChexSystems is a common example.
How to avoid overdrawing your checking account
Know where you stand with your checking account at all times
You don’t have to monitor your account to the penny but within your tolerance limits. Many banks offer notifications if you fall below a certain dollar amount, which I find can be very helpful.
Get overdraft protection
I am a fan of overdraft protection if tied to a savings account or a line of credit. This second option can be beneficial to your credit score in a couple of ways. It helps you avoid any embarrassment or other hassle when paying if you have miscalculated how much cash you have on hand.
There is a caveat though: You must treat this protection like all of your financial products if you want it to be beneficial to your score. Know how much cash you have on hand and don’t over-extend yourself just because you have overdraft protection. Remember that there are fees involved if this protection is activated, and they can be rather large.
Adopt a “pay yourself first” mentality
If your overdraft protection is activated and it’s attached to a line of credit, then you are borrowing from the bank. A savings mantra says to “pay yourself first,” and the same principle holds true here. If you rely on overdraft protection instead of knowing what your financial situation is at all times, you are adopting a “charge yourself first” or an “I’ll catch up later” attitude. And that’s no way to live a healthy financial life.
Remember to keep track of your score!