Nov 23 2009

How Overdrafts Can Affect Your Credit Score

With overdraft fees taking its toll on many banking customers, it is increasingly common that consumers are unwilling to pay them.

An overdraft is any “legitimate” transaction that results in a negative balance in a checking account. The most typical reasons for insufficient funds that lead to an overdraft are:

  • too many charges on your debit card
  • written checks you forgot about
  • automated bill payments
  • monthly account fees
  • failed check deposits
  • fraud

Whenever your bank chooses to honor a payment, charge, or check (despite leaving you with a negative balance), the penalty is usually an overdraft fee of at least $30.

How It Won’t Affect Your Credit Score
If you deposit enough money to correct the balance, which includes paying the overdraft fee, the overdraft will have no effect on your credit score since it is never reported to the credit bureaus.

But If You Don’t Pay The Fees…
However, an overdraft can hurt your credit score when your bank turns to a collections agency to retrieve the negative amount that you owe. This occurs only when you neglect funding your account for a certain time period (specified by your bank) to cover the negative balance. The collections agency would show up on your credit report and, therefore, will affect your credit score – in a very bad way.

Why can banks do this? When you opened your checking account, you signed off on a bunch of papers. Within those papers, it states that you agree to let them charge an overdraft fee and that the bank can send your account over to a collections agency.

The only preventive measure from having an overdraft hurt your credit score is to remove the negative balance as soon as possible. Keeping adequate funds, regularly checking your bank accounts, and setting up alerts will reduce your chances of an overdraft in the future.

Check if you have any red marks against your banking accounts such as checking and savings by requesting a free annual report at ChexSystems.

(Photo credit: Neubie)

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3 Comments on this post

Trackbacks

  1. 8 Things That Do Not Affect Your Credit Score | Realm of Prosperity wrote:

    [...] an overdraft on your checking account. Unless your bank reports you to a collection agency for the overdrawn amount, the only penalty would be the overdraft [...]

    December 1st, 2009 at 2:03 am
  1. Ashley said:

    Good reminder! I’d assume that most people pay off the balance when they get an overdraft, but I guess not all do. It’s important to realize you can’t just walk away from that fee, it still needs to be paid.

    November 23rd, 2009 at 3:20 pm
  2. Cap said:

    on a side note, another minor way ‘overdraft’ can ding your credit score is when you apply for any checking accounts with an overdraft protection. generally the bank in question will run a hard credit pull / inquiry, thereby giving you a slight ding to your credit score for the next 6 months. though if this is the only hard credit pull in recent years/months, I wouldn’t lose any sleep over it.

    November 24th, 2009 at 11:06 pm

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