Cash News
If you have overdraft coverage, your bank or credit union will spot you on certain transactions that would put your checking account balance in the negative. In many cases, the financial institution will charge an overdraft fee.
But does an overdraft affect your credit score? It’s possible. Here’s what you need to know about both the short- and long-term consequences of overdrafts and how you can minimize their impact on your credit and overall finances.
Does overdrafting affect your credit score?
Spending more than you have in your bank account typically won’t hurt your credit score because banks don’t report checking account information to the consumer credit bureaus.
However, an overdraft is still a debt you owe to the bank, and if you don’t resolve the negative balance, the financial institution may eventually send the debt to collections. The collection agency will then report the debt to the credit bureaus.
Whether or not it impacts your credit score depends on how much you owe. If it’s under $100, the latest versions of the FICO credit score will ignore it. If the collection amount is $100 or more, however, it can cause significant damage to your credit score.
In both cases, the collection account will remain on your credit reports for up to seven years, and a smaller collection account can still impact your ability to obtain affordable credit.
Other consequences for frequent overdrafts
Even if you resolve overdrafts quickly, your bank may not let you off the hook easily, especially if your account balance goes negative often. Here are some of the other potential consequences to consider:
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Overdraft charges: Overdraft fees can vary by bank, but they’re typically around $35 per transaction. These charges can make it more difficult to bring your account back into positive territory, especially if you have multiple overdrafts in a short period.
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Your transaction may be declined: Banks typically place a limit on how much overdraft coverage they offer, and if you repeatedly overdraft your account and hit that limit, the bank may not honor future transactions until you resolve the negative balance.
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The bank may close your account: If you make a habit of overdrafting on your account, the bank may consider you to be too much of a risk and close your account.
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You may have a hard time getting another bank account: While banks don’t report overdrafts to the major credit bureaus, they do report them to ChexSystems, a consumer reporting agency for deposit accounts. If you try to open another bank account, the financial institution may deny your application if it sees multiple overdrafts on a previous account in your ChexSystems report.
Note that if it’s your first time and you have a history of being a good customer, you may be able to get an overdraft fee waived. You may also be able to avoid an overdraft charge and other consequences if you resolve the overdraft on the same day it occurred.
4 tips for avoiding overdrafts
If you’re concerned about the ramifications of overdrafting your bank account, here are some steps you can take to avoid them.
Set up overdraft protection
While the terms overdraft protection and overdraft coverage are often used interchangeably, there’s an important distinction. With overdraft protection, the bank transfers money from one of your other accounts to cover the negative balance instead of spotting you the cash.
Depending on the bank, you could use a secondary checking account, savings account, money market account, line of credit, or even a credit card as your overdraft protection account.
Just keep in mind that some banks may still charge a fee each time you use this feature, though it’s typically lower than an overdraft coverage fee. Also, if you designate a line of credit or credit card as your overdraft protection account, you may also have to pay interest.
Maintain a buffer in your checking account
Even if you don’t make a habit of overdrafting your account, it could happen if you don’t pay attention to your account balance or forget about a recurring charge.
To avoid this possibility, consider maintaining a buffer in your checking account that exceeds your expected expenses for the month. The amount you maintain will depend on your financial situation and ability to save, but even a small amount could help you avoid an overdraft.
Set up a budget
It can be easy to accidentally overdraft your bank account if you aren’t keeping track of your expenses. There are many different ways to budget, but the most important steps are to set spending goals each month and to track your expenses.
These two simple steps can make it easier to manage your money responsibly and avoid spending more than you earn.
Opt for a bank that doesn’t charge overdraft fees
Avoiding overdrafts entirely can be challenging if you’re experiencing financial hardship. In that case, it could help to get a checking account that doesn’t charge an overdraft fee.
While that may not prevent other potential consequences, especially if you make a habit of overdrafting, it can minimize the short-term impact of letting your bank account balance go negative.
Read more: The best checking account bonus offers and promotions today
Frequently asked questions
What happens if you keep overdrafting?
If you have frequent overdrafts on your bank account, your financial institution could charge you multiple fees, making it difficult to resolve negative balances. Additionally, repeated overdrafts could result in declined transactions and even an account closure.
If you try to open an account with another bank, the negative marks on your ChexSystems report could make it difficult to get approved.
What happens if your bank account is negative for too long?
If you don’t resolve your negative balance, your bank may send the debt to collections, which could negatively impact your credit score. That said, there’s no universal timeline for when this occurs, so it’s important to address an overdraft as quickly as possible.
How many times can I overdraft my account?
There’s no universal limit for how often you can overdraft a bank account, but banks may limit or even close your account after frequent overdrafts.