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Does overdraft affect credit score

does overdraft affect credit score

Overdrafts from your checking account can be stressful and leave you wondering how other aspects of your finances will be affected. You may be wondering do overdrafts affect credit? Keep reading for more info on credit scores and how overdrafts can influence them! 

What Is a Credit Score?

Your credit score is a three-digit number determined by certain financial habits and behaviors. Credit bureaus collect information from the different financial institutions you work with and compile the data into a credit report. The three major credit bureaus who collect your financial data are Experian, TransUnion, and Equifax. 

You can view your own credit report by performing a soft credit check. Many banks, credit card issuers, and other financial institutions allow their customers to view their credit scores and reports for free at any time. You can also view a free copy of your credit report from Experian, TransUnion, or Equifax for free once a year. 

What Does It Mean To Overdraw From a Bank Account?

When a transaction for more money than is in a checking account goes through, the result may be a bank account overdraft. When you overdraw from your bank account and do not have overdraft protection, you will end up with a negative balance that may cause major financial difficulties down the line. 

How Do Overdrafts Affect My Credit Report? 

While an overdraft may not directly affect your credit score, it can easily lead to other situations that will certainly negatively affect a credit report. For example, bank overdrafts and negative balances can lead to missed payments on bills and other expenses. 

Suppose you had automatic payments set up for a credit card with a minimum payment of $25 a month. If you had less than $25 in your checking account when the credit card company attempted to put that automatic payment transaction through, the payment might be rejected. Unfortunately, missed payments to credit card companies and other financial institutions can negatively affect your credit report for up to seven years. You may see your credit score drop a few points or more during this time. 

Furthermore, failure to rectify a negative bank balance can lead to repeated missed payments and potentially loan default. Defaulting on a loan or having your debt sent to a collection agency will create another negative mark on your credit report and may even lead to a Chexsystems report. A Chexsystems Report shows history of financial delinquency to financial institutions like a collections agency, bank, or credit union.

Other inconveniences that may arise due to a bank overdraft are bounced checks and immediate rejection for any future transactions attempted with the account. 

What Happens When You Overdraw Your Bank Account?

What happens if your bank account goes negative? If you spend more money that is available from your account and overdraw, your bank may stick you with an overdraft fee. These fees may recur on a daily, weekly, or monthly basis until the account balance is positive. 

Usually, account holders will have to pay interest on any unpaid overdraft fees. To avoid accumulating more debt, it is in your best interest to pay any fees and make your bank account positive as soon as possible.  

What Should You Do if Your Checking Account Is Overdrawn?

When notified that your bank account is overdrawn, the first thing you want to do is take a look at your most recent transactions. Make sure the transaction history shows accurate information. If you find a fraudulent charge that caused your account balances go negative, notify your bank immediately. In circumstances like this, your bank will credit your account for the amount of the fraudulent charge and refund any overdraft fees charged

If you find the overdraft amount accurate, locate the specific transaction that caused your account to go negative. From there, you want to create a payment plan so you can add sufficient funds to your account as quickly as possible. If possible, move any extra cash available in a savings account to rectify the issue immediately. But, if your bank account is overdrawn and you have no money, you may want to look into a quick cash option like a: 

What Else Can Affect Credit Reports?

What else can affect your credit score? Credit scores are compiled based on five major financial categories. While the specifics of certain credit scores systems may differ depending on the kind of credit report you get, scores are generally based on the following factors: 

Payment History

Payment history is the most impactful kind of financial history that contributes to your credit score. Paying on time consistently shows credit bureaus that you are a responsible borrower, while delinquent history indicates the opposite. 

Length of Credit History

How long consumers have had financial accounts open also affects credit scores. The longer the record of your financial history is, the more financially experienced you are in the eyes of many banks, lenders, and financial institutions. 

Credit Mix

Lenders can also see the various types of credit accounts you have on your credit reports. Having a healthy mix of funds may work in your favor and show lenders that you are able to handle your financial obligations well. 

Total Debts

How much money you owe in debts compared to your income also goes into your credit rating. Ideally, you would want to keep your debts relatively low in comparison to your average income.  

Recent Hard Credit Inquiries 

History of how often you apply for a loan or credit card also goes on credit reports. Generally, it is best to limit the amount of hard credit checks you accumulate to show lenders you are a responsible borrower. For example, if your credit history shows frequent applications for payday loans online same day, more reputable lenders may be wary and unwilling to work with you. 

How Can a Bad Credit Rating Affect You?

When you complete most loan applications or credit inquiries, the lender will perform a credit check to review your financial history and credit score. This score often plays a major role in determining loan approval and other details like interest rates and loan amounts. 

Borrowers with a higher credit score are seen as less of a financial risk to lenders. This decreased risk is why lenders tend to feel more comfortable offering lower interest rates and higher loan amounts to people with good credit. 

On the other hand, lenders tend to view people with lower credit scores as being a high lending risk. Traditional lenders like banks usually don’t take the risk of lending to potentially unreliable borrowers, which is why it may be difficult to find approval for a bank loan when you don’t have ideal credit. 

If you let your overdraft affect your credit score, you may find it challenging to receive approval for loans, mortgages, or other financial products in the future. 

How To Prevent Overdrafts From Checking Accounts

Thankfully, there are precautions you can take and habits you can develop to stop this from happening. Check out the tips below for how to prevent unwanted overdrafts on your bank or checking account. 

Enroll in Overdraft Protection 

The most popular ways account holders prevent bank account overdrafts is to enroll in overdraft protection. Overdraft protection is a service provided by most banks and financial institutions that helps prevent accounts from going negative. Some overdraft protection programs are a credit limit provided by the bank, where the account holder has protection up to the amount of the credit limit. Other overdraft protection programs are designed to remove money from an account holder’s savings account if insufficient funds are in a checking account. 

Create a Budget and Stick to It

Along with enrolling in overdraft protection, it may also be a good idea to create a budget to keep your finances organized. Budgets are a great way to visualize your financial situation and monitor your spending habits. When you keep track of your expenses and spending, you should also stay familiar with your bank account balances. Knowing how much money you have available is a surefire way to make sure you don’t accidentally overspend and overdraw your account. 

Can a Financial Institution Help Me Improve My Credit Score After an Overdraft? 

If you are dealing with overdrafts or overdraft fees, a loan may be the fastest way to rectify the situation. Certain loans can even help borrowers improve their credit scores. These credit builder loans allow people to get financial assistance in an accessible and helpful way. 

Depending on your financial situation, you may be able to get a credit builder loan from the following places: 

  • Credit unions, under the regulation of the National Credit Union Administration. 
  • Direct lenders. 
  • Unsecured or secured lenders. 

To keep your credit score and finances intact, you may want to avoid funding options like payday loans, credit card cash advances, or title loans. These high-interest funding options can be risky and leave you in more debt. 

To avoid risking your finances, try not to overdraw from your checking account.

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