Does Overdraft Affect Credit Rating?

Overdrafting your checking account can lead to a financial crisis if you're not careful. Constant overdraft fees and playing catch-up with your bank create a troubling spiral that can leave you unable to meet your current financial obligations. A common question when dealing with overdrafts whether they have any impact on your credit rating.

Overdraft Basics

When you attempt to spend money you don't have, either by using your debit card or by withdrawing cash from an ATM, your account is considered to be in overdraft. As a result, you can expect to pay a fee of $35, in addition to replacing any money the bank laid out to cover your transaction.

Legislation enacted in August 2010 essentially banned overdrafts without the customer's consent, but you can easily overdraw your account unintentionally even if you opted out of overdraft protection. For example, when you buy gas at the pump, your debit card is charged only $1; if you fail to account for the remaining portion, you may end up overdrawing your account.

Impact on Your Credit

In most cases, overdrawing your account won't impact your credit score. Banks don't report overdrafts to the credit bureaus, so there's no need to worry about affecting your credit through overdrafts. However, you may run into trouble handling overdraft fees; since the bank immediately charges the fees to your account, you may find yourself short when it's time to pay your credit card bills. If this happens to you, and you don't make payment within 30 days of the due date, the late payment may be reported to the credit bureaus. In addition, if you've linked your checking account to a credit card in the event of an overdraft, it might result in a card with a high balance going over the limit, which would hurt your credit rating.

Collections

The only time you have to worry about a bank account hurting you on your credit report is if the account is sent to collections. This can occur if you have an overdraft and don't pay back the money your account is overdrawn. Having an account go into collections is a serious negative mark on your credit report, one that will stay on your file for seven years. If your bank account or any other item goes into collections, your credit score will suffer.

Consumer Reporting

Although banks don't report your checking account activity to credit bureaus, an overdrawn account won't go unnoticed. Consumer reporting agencies, such as ChexSystems, regularly obtain information about your checking and savings accounts; if your account is overdrawn, there's a good chance your bank will report it to ChexSystems and other consumer reporting agencies. While this information doesn't affect your credit rating, it can be used against you if you try to open a new bank account. Furthermore, some companies rely on consumer reports to make determinations about your creditworthiness if you don't have any significant credit history.