If you’ve ever overdrawn your checking account, you’re familiar with that dreadful feeling, especially if you were then hit with a hefty fee. Take a deep breath if you’re worried about how an overdraft will affect your overall financial health: Checking account overdrafts have no direct impact on your credit score. They can, however, have an indirect impact on your credit if you do not pay what you owe.
1. Do Checking Accounts Appear on a Credit Report?
Every credit card and loan you have appears on your credit report as evidence that you borrow and repay the money from a lender. A debit card, on the other hand, draws money from a checking account, so you’re not borrowing from anyone. As a result, checking accounts are not listed on credit reports.
That is, even if you spend more than you have in your account and incur an overdraft fee, the overdraft will not be reported to your credit bureau. Phew.
However, you should be aware that ChexSystems, a banking reporting bureau, keeps track of your deposit accounts with banks and credit unions. Your account activity is monitored, including overdrafts, bounced checks, unpaid negative balances, involuntary account closure, and any fraud involving your card, account, or ATM.
If your ChexSystems report shows a history of repeated irresponsible account use, you may be denied when applying for a new bank account. However, this has no bearing on your credit or ability to obtain a loan or credit card. You should also be aware that there are methods for cleaning up your ChexSystems report, and some banks offer second-chance accounts in which they are willing to either not use ChexSystems or overlook more dings than usual.
2. Should I Keep My Overdraft Protection?
If you frequently overdraw your bank account and pay a lot of money in overdraft fees each month, you should think about dropping overdraft protection. Just be aware that if you attempt to make a purchase with your debit card and do not have sufficient funds in your account, the transaction will be declined. Yes, this may cause some embarrassment at the checkout counter, but it will save you from incurring costly overdraft fees.
As a form of overdraft protection, you could link a savings account to your checking account. If you don’t have enough money in your checking account when you go to make a purchase, the money will be taken from the linked account. You won’t be declined, but your bank will almost certainly charge you a fee—though it will be much lower than on an overdraft that isn’t linked to a savings account.
3. How an Overdraft May Impact Your Credit
An overdraft can have a negative impact on your credit if it is sent to collections. You’ll be fine if you pay the fees and negative balance after an overdraft. However, if you do not repay what you owe, the financial institution may send the debt to collections. When a collection agency opens an account on your behalf, it may appear on your credit report.
When an account goes to collections, no matter how large or small, it is marked as a delinquency on your credit report and remains there for seven years. To avoid this scenario, make sure to pay back the overdraft balance and fees as soon as possible.
Avoiding collections and understanding how other factors affect credit can help you keep your finances in order:
- Payment history: Because this accounts for the majority of your credit score, any late or missed payments will have a negative impact on your credit.
- Credit utilization: Creditors prefer that you do not use more than 30% of your available credit at any given time, so keep your balances as low as possible.
- Credit mix: Having a variety of account types, such as credit cards and loans, demonstrates your history with different types of debt and can help your credit score.
- Hard Inquires: When you apply for credit and a lender checks your credit report, these appear on your report. These inquiries can temporarily lower your credit score, especially if you have a large number of them in a short period of time.
- Negative information: Charge-offs, foreclosures, bankruptcies, and debts in collections can all have a derogatory mark on your credit score.
4. Yet Another Way to Raise Your Credit Score
If you’re reading this, you’re probably concerned about keeping your credit score as high as possible. Previously, service accounts such as phone utility bills were not factored into credit scores; however, Credit Cadabra now allows you to get credit for on-time payments on your utility and telecom accounts. If you pay your bills on time, you may notice a quick improvement in your FICO® Score.