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Does Overdraft Affect Your Credit Score?

Last updated 03/19/2024 by

Jamela Adam

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Fact checked by

Overdrafts typically don’t directly affect your credit score. However, if you don’t pay the resulting overdraft fees, the financial institution may report your activity to a credit reporting agency. This could then affect your credit rating and show other financial institutions that you may not be financially reliable.
If you’re worried about negatively affecting your credit score by overdrawing your account, don’t panic. In most cases, overdrafts won’t leave a stain on your credit report, especially if you pay your overdraft fees promptly. Many banks offer overdraft protection on checking accounts, which automatically covers the cost of any purchases made with a debit card that doesn’t have sufficient funds.
However, an overdraft doesn’t mean that you can borrow money for free. You still have to pay overdraft fees and interest charges on the amount owed. Not doing so can get you in financial trouble and even indirectly affect your credit score. Read on to learn more about how overdrafts work and how they can impact your financial health.

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Do debit card overdrafts affect credit scores?

Because your checking account information isn’t reported to credit reporting agencies, overdrafts won’t negatively affect your credit score if you pay the overdraft fees.
It’s important to note that if you let those overdraft fees add up and never bother to pay them, the financial institution can send your overdrawn account to a collection agency. Once the debt collection agency creates an account for you, your credit score will probably take a hit. Moreover, anytime your debt is sent to collections, this record will stay on your credit report for seven long years.

How do credit scoring systems work?

In a nutshell, your credit score is a three-digit number that represents your creditworthiness. Credit reporting agencies calculate credit scores using computerized algorithms that weigh several factors, including how much debt you owe and your payment history.
Your credit can range from 300 (the worst) to 850 (the best).
The higher the credit score you have, the less risky it is for lenders to loan you money. Due to your lower risk of default, you can often get a better interest rate on a loan or credit card than those with bad credit.

Is your credit score impacted by your checking account?

Though credit bureaus won’t keep tabs on your checking account unless it’s sent to a collection agency, your account is still closely monitored by a banking reporting bureau called ChexSystems.
ChexSystems specializes in tracking customers’ banking activity. They do this by collecting data on bounced checks, overdrafts, and other types of irresponsible account use. Therefore, because banks use ChexSystems’ reports to assess the riskiness of potential customers, you can have a difficult time opening a new checking account if you have a history of constant overdrafts.

Does an overdraft affect getting a mortgage?

Not necessarily. Lenders don’t provide a definitive answer. The effect of an overdraft on your mortgage application will vary depending on your financial circumstances and the lender you’re applying to. Overall, it’s uncommon for mortgage lenders to decline applications due to overdraft fees.
However, if you’re constantly overdrawing your account and even have various overdraft accounts with different banks, lenders may see that as a sign of financial instability. Of course, lenders use more than bank accounts to accurately assess your ability to afford mortgage payments, as they’ll also review income, credit scores, and credit reports.

How much are overdraft fees?

How much your overdraft fee is will largely depend on your bank’s overdraft policies, but the majority of financial institutions charge a flat fee for each overdraft.
For example, JPMorgan Chase charges an overdraft fee of $34 per transaction when you overdraw your account by more than $50. However, the maximum number of charges is limited to three times per business day. This means Chase can only charge you a total of $102 each day.
Keep in mind that if you don’t pay off your overdraft fees, interest charges can quickly pile up.

Pro Tip

Make sure to create a cash cushion in your checking account to cover any unexpected transactions that may push your balance below zero. This might be difficult if you don’t have much money saved up, but it’s worth it to avoid those pesky fees that can worsen your financial situation.

How to quickly pay off your overdraft fees

Even if you keep a close eye on your checking account, mistakes happen. If you incur overdraft fees, it’s best to pay them off quickly rather than ignoring them.
  1. Make extra payments each month. If you have money set aside, allocate some of your savings to make extra payments on your overdraft debt. Even if it’s just a small amount, every bit counts when it comes to tackling debt.
  2. Take advantage of 0% money transfer credit cards. Interest charges on overdrafts can quickly add up. If you’re struggling to pay off overdraft fees, you may want to consider using a 0% money transfer credit card. You can transfer your overdraft debt into this card where no interest is charged for a set period of time. This can be a great way to help you get out of debt quickly. Make sure to do your research and compare different offers before you decide on a card.
  3. Consider consolidating your debt. If you have multiple debts apart from your overdraft fees, consider consolidating them into one loan. This can help you save money on interest and make it easier to keep track of your payments.

How to avoid overdraft fees

Obviously, we all want to avoid overdraft fees when at all possible. To keep yourself from incurring unwanted fees, follow these steps:
  1. Keep a close eye on your account balance. This may seem like common sense, but it’s easy to lose track of how much money you have in your account, especially when you’re busy. Make sure check your account balance and track any upcoming payments or expenses that may deplete your funds.
  2. Set up account alerts. Most financial institutions offer account alert systems that notify you via text or email when your balance is about to approach zero. This way, you can transfer funds into your account to avoid overdraft fees. Be sure to check with your bank or credit union to see if this option is available to you.
  3. Link your account to a savings account. If you have a savings account, you can link it to your checking account so that funds can transfer if you need them. While there’s usually a fee for this service, it’s still cheaper than overdraft fees.
  4. Get a prepaid debit card instead. If you often find yourself running low on funds and overdrawing your checking account, a prepaid debit card may be a great alternative option for you. This type of card isn’t linked to checking accounts and will only allow you to spend the money you’ve already deposited into the card.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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Should you keep your overdraft protection?

There are pros and cons to overdraft protection. On the one hand, it provides you access to funds even when you don’t have enough money in your account. This protects you from the embarrassment and inconvenience of getting your card declined in public. On the other hand, overdraft fees can be quite expensive. You’ll also incur interest charges on the amount that you owe.
What’s the bottom line? Should you keep your overdraft protection? It depends on your individual circumstances. If you don’t want your purchases declined or risk of having insufficient funds during an emergency, then overdraft protection may be helpful to you. But if the balance in your bank account is often low, then you might want to opt out of it to avoid constantly going in the red and overusing overdraft payment programs.

Key Takeaways

  • An overdraft won’t affect your credit score if you pay off the overdraft fees and interest charges promptly.
  • If you avoid or fail to pay off your overdraft fees, your bank can send your account to a collection agency. When this happens, you’ll see a negative record reflected on your credit report.
  • There are a few things you can do to protect yourself from overdraft fees. In addition to keeping a close eye on your checking account balance, you can set up account alerts or use the overdraft protection transfer service provided by most financial institutions. You can also consider prepaid debit cards to completely eliminate the possibility of overdrawing your account.
  • Bank account overdrafts rarely result in a rejected mortgage application. However, if you regularly overdraw your account, lenders might see this as a sign of you having trouble properly managing your finances.

Minimize your fees with the right bank

Overall, overdrafts aren’t as bad as you may think. Provided that you pay off the fees as soon as you can and don’t habitually overdraw your account, infrequent overdrafts will not negatively impact your credit score. However, if you repeatedly go over your account limit and never pay off those fees, you can expect to see some negative consequences reflected on your credit report.
If you often find yourself dipping into negative balances, it might be time to switch to a checking account that doesn’t charge hefty overdraft fees. Check out our list of the best checking accounts with no overdraft fees for some great options.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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