Does an Overdraft Affect Your Credit Score?
6 Min Read | Published: August 30, 2024
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Overdrafts won’t typically impact your credit score, but in some cases, they can. Learn how overdrafts work and the impact they could have on your credit.
At-A-Glance
- An overdraft applies when you don’t have sufficient funds in your account to pay for a transaction or withdrawal, but your bank still covers it.
- Typically, you can opt into overdraft protection if you’d like to prevent declined transactions or bounced checks that result from overdrafts.
- To avoid overdrafts, keep a close eye on your balance, sign up for low balance alerts, and try to keep additional funds in your account to cover unexpected costs.
In a perfect world, you’d always have enough money in your account to cover your transactions. However, at some point, you may end up going into overdraft. Whether it’s because you thought that you had more funds in your account than you did, or simply found yourself running short at the end of the month.
If you make a purchase or a transaction occurs and you don’t have sufficient funds to cover it, you’ll overdraft your account. If this happens to you, don’t worry, going into overdraft is a common mistake. Below, we’ll dive deeper into how an overdraft works and see whether it’ll impact your credit score.
What Is an Overdraft?
An overdraft occurs when you don’t have the funds in your account to completely cover a transaction or withdrawal, but your bank or financial institution still allows it to go through.1 Let’s say you spend $100 at a restaurant and pay for your meal with a debit card. If you only have $85 in your account, this purchase will cause you to go into overdraft by $15.
What Is Overdraft Protection?
If you opt into overdraft protection, you can link another account, such as a line of credit, savings account, or even a credit card to your checking account.2 This means that if you withdraw more funds than you have in your account, overdraft protection will kick in. Your bank or financial institution will automatically transfer money from your linked account to your checking account. This will allow your transaction to go through and help you avoid a declined payment.
How Overdrafts Impact Credit Scores?
Fortunately, an overdraft typically won’t have a direct impact on your credit score. If you overspend and face an overdraft, it won’t show up on your credit report. However, if you don’t repay what you owe and the overdraft ends up getting sent to collections, then this could show up on your credit report, and may negatively impact your credit score. Another way that an overdraft could potentially impact your credit score is if you have a credit card that’s linked to your account’s overdraft protection. If your overdraft causes you to increase your debt on the credit card, then it could impact your credit score.
Even if you only owe a small amount of money, it’ll be reported as a delinquency and stay on your report for up to seven years.3 To avoid this issue, be sure to always pay back the overdrawn amount as well as any fees your bank may charge.
What Is ChexSystems?
ChexSystems is a banking reporting agency that monitors your checking and savings account activity. It keeps tabs on overdrafts, unpaid negative balances, bounced checks, suspected fraudulent activity, and other issues. When you apply for a new account at a bank or credit union, the financial institution may pull your ChexSystems report to determine whether to approve you. If your report positions you as a risky customer due to your financial habits, they could deny your application for a bank account.4
Did you know?
You can access your ChexSystems report for free once every 12 months on the ChexSystems website.5
How to Avoid Overdrafts
These tips can help you avoid overdrafts and ensure that you have enough money in your account to cover your outgoings:
- Monitor Your Account Closely
Take the time to keep track of the funds in your checking account regularly. You can sign up for online banking or download your bank’s app so you can quickly check your account balance and manage your money no matter where you are.
- Enroll in Balance Alerts
Most banks and other financial institutions offer balance alerts. Once you opt into them, you’ll receive a notification any time your account dips below a certain amount. Balance alerts may also alert you of large withdrawals or suspicious account activity.
- Keep Extra Funds in Your Account
If you keep additional funds in your account, you can reduce the risk of overdrafts. This cushion may allow you to pay for a subscription you forgot about or an unexpected charge, for example, without having to go into overdraft.
Frequently Asked Questions
If your bank or financial institution charges you an overdraft fee, you may be able to negotiate with them for reimbursement. Whether or not they reimburse you will depend on the financial institution and their policies, but it doesn’t hurt to request a refund.
Overdraft fees occur when a transaction or withdrawal exceeds the funds you have in your account. Non-sufficient funds or NSF fees, on the other hand, may apply if you don’t have enough money in your account for a transaction, such as a check or ACH transfer and the bank cancels it.6
Overdraft fees vary by bank or financial institution. However, they can run upwards of $35 per transaction.7
The Takeaway
An overdraft occurs when you don’t have sufficient funds in your account to cover a transaction, but your bank pays for it anyway. Fortunately, an overdraft won’t typically hurt your credit score unless that overdraft is unpaid and makes it to collections. To reduce your risk of overdrafts, check your balance often, sign up for low-balance alerts, and always try to keep extra funds in your account.
1,7 “Overdraft Explained: Fees, Protection, and Types,” Investopedia
2 “What is Overdraft Protection?,” Bankrate
3 “Does an Overdraft Affect Your Credit Score?,” Experian
4,5 “What Is ChexSystems?,” Experian
6 “5 Ways to Avoid Overdraft Fees,” Experian
Anna Baluch is a personal finance writer from Cleveland, OH. She enjoys helping people from all walks of life make smart financial decisions. Her work can be seen on Credit Karma, Forbes, LendingTree, Insurify, and many other publications. Connect with Anna on LinkedIn.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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