Does an overdraft affect your credit score?

Quick insights

Have you ever opened your banking app to discover that you’ve spent more than you have in your checking account? If so, you may have encountered an overdraft. Overdrafts may result in negative financial effects. If you’re wondering whether this could affect your credit score, you’re not alone.

Let's learn more about overdrafts and their potential impact on your credit.

Overdrafts and credit reports

Spending more than you have in your checking account can result in a negative balance, known as an overdraft. In most cases, an overdraft won’t appear on your credit report. However, there are some important exceptions you may want to consider. 

Checking accounts and credit reports

Checking accounts aren’t directly tied to your credit. Activity related to checking account fees, such as overdrafts, generally doesn’t appear in traditional credit reports. 

While your checking account activity doesn’t directly impact your credit score, you may see a negative impact if you don’t pay back what you owe.

When overdrafts could impact credit

A single overdraft that is repaid promptly is unlikely to show up on your credit report, but it’s not impossible for an overdraft to impact your credit.

Failure to resolve the overdraft

If a negative balance is not repaid after a long period of time, your bank may close your checking account and send the pending fees and negative balance to a collections agency. Collections agencies report many types of debt to the three major credit bureaus, so this may lead to a negative impact on your creditworthiness.

Negative effects to your credit report

Even a small unpaid overdrawn balance that is sent to collections can appear on your credit report for up to seven years. Therefore, it’s crucial to understand your bank’s overdraft policy and abide by it. Repay overdrawn balances promptly to avoid going into collections.

Overdraft protection and credit

Overdraft protection isn’t specifically designed to protect your credit, but it may offer indirect benefits. For example, it may prevent your account from falling into a negative balance that you’ll need to repay. Overdraft protection may also help you avoid bounced payments to other businesses, such as utility companies or lenders, that could report missed payments to credit bureaus.

What is overdraft protection?

Overdraft protection is an optional service offered by many banks. When you attempt to make a payment without sufficient funds in your checking account, a backup funding source is used to cover the transaction. In many cases, this takes the form of a linked savings account, credit card or line of credit.

Transactions may still be declined if you lack funds in both your checking account and the linked backup source. While overdraft protection offers a layer of financial security, it doesn't mean you can continue to spend beyond your account balance or eliminate the risk of overdrafts.

Your bank may also charge a fee for using overdraft protection, but this fee is typically lower than the fee you’d be charged for overdrawing.

Does overdraft protection affect credit?

Whether overdraft protection directly impacts your credit score depends on your backup funding source. If you link a standard deposit account, like your savings, overdrafts won’t directly impact your credit score. However, if you link to a credit card or line of credit, any funds advanced to cover an overdraft can increase your balance, potentially impacting your credit utilization ratio, a factor in your credit score.

Additionally, regardless of the backup funding source, if overdrafts and declined transactions result in missed or late payments for your bills, like missing credit card payments, this could harm your creditworthiness and make it more challenging to apply for loans or open new lines of credit in the future.

It may be helpful to view overdrafts not just in terms of immediate credit impact, but as part of your overall financial health. Repeatedly overdrawing your account may suggest a broader concern, such as challenges managing finances.

Preventing overdraft-related credit issues

The good news is that protecting your creditworthiness is possible even with an occasional overdraft. Here are some tips that may help you avoid issues related to overdrafts:

Resolving overdrafts quickly

Avoiding overdrafts is ideal, but paying off overdrafts quickly can help you avoid escalation to collections and potential credit impacts.

Alternatives to overdrafts

You can link your savings account to your checking account and sign up for overdraft protection to avoid repeated overdrafts. You could also use mobile banking account alerts to monitor your checking account balance closely and avoid overspending.

If it makes sense for your finances, you could also consider choosing a checking account that declines transactions that exceed your available balance.

In summary

While resolved overdrafts may not directly harm your credit score, they can still have consequences, including overdraft fees. Unpaid overdrafts may impact your credit if your bank sends the balance to collections.

It can be helpful to repay overdrafts as soon as possible to protect your credit score and your banking history.