Can overdraft fees affect your credit score?

Overdraft protection is a beautiful thing. 

The idea of taking a few extra dollars out of your account when you're in need is nice and could really save you from an unfortunate situation—and sometimes might be the best option instead of dipping into your savings account but the confusion behind overdraft protection still seems to raise many questions.  

Can overdraft affect your credit score? Is it a loan? How do I avoid overdraft fees?

These are all valid questions, even though overdraft fees have been around since the 90s many people still aren't quite sure about them.

The big question

No, overdraft fees (or non-sufficient fund fees) don’t generally have a negative impact on credit scores—as long as they’re handled in a timely manner. 

Because overdraft fees are a function of your checking account and deal with your own money (not borrowed money), they won’t directly have an effect on your FICO score, however, that could change if not taken care of. 

If your bank account is left with a negative balance for too long, eventually it will be sent to a collection agency for further action but the amount of time your account can be left below zero will vary depending on your bank. Be sure to do the proper research on your specific overdraft rules. If you’re in overdraft for too long, the debt collector will then report the account to your credit bureaus, which will remain on credit reports for seven years, even after the debt has been settled. 

Benefits of overdraft protection 

Overdraft protection can be extremely helpful during a cash crunch and could potentially help you improve cash flow in certain instances, however, the costs associated with overdrafts are unsustainable and may leave you feeling slightly disheartened. 

If you’ve ever found yourself in an unfortunate financial situation but needed one last purchase to hold you over until payday, then overdraft protection might be perfect for you. It can be a nice little emergency cushion in your bank account to rely on when making purchases. It can also save you from times of embarrassment. 

When you have a line of people behind you at the store and no money left in your checking account, overdraft protection can feel heaven-sent. 

What they don’t tell you about overdraft protection 

Overdraft is a tool designed to help people as a last resort in their checking account and it does its job well in that sense but what some people don’t recognize is all the additional costs associated with it. 

A simple $5 overdraft fee typically leads to $30-$35 in additional fees which clearly isn’t ideal for the person who needs it. These outrageous fees may seem illogical but they help ensure the bank doesn’t essentially start giving out money, after all, they're not an EWA. 

What CAN affect your credit score? 

Your credit score is made up of many factors and moving parts, some of which you might not have even realized. 

Your credit score or FICO score is a number or grade that essentially gives financial institutions a better understanding of how you deal with money. 

Your credit score takes things like payment history, credit utilization and negative report information like bankruptcies and foreclosures into consideration. This can be extremely bothersome, especially for those looking for a fresh start but these scores help ensure your financial institution can properly assess the risk that comes with lending certain people money. This is all part of the proper due diligence that banks require to ensure things can continue to run smoothly. make the right decisions and don’t lead to trouble for us all. 

If you’re concerned about the things that may negatively impact your credit score, make sure to take these things into consideration. 

Payment history:

Your payment history is usually the biggest factor in determining your credit score. Any late or missed payments will negatively impact your credit score for at least seven years. It is important to stay on top of these payments to the best of your ability.

Credit utilization: 

One effective way for creditors to see how you use your money is through credit card utilization. This will usually give them a pretty solid understanding of how often and how dependent you are on your credit card. Creditors generally prefer that you use less than 30% of your available credit. 

To figure out your credit utilization ratio, simply take the amount of credit available to you and divide it by your current balance when checking your credit report. 

For instance, if your credit limit is $1,000 and you’re trying to stay mindful of keeping your credit utilization at 30%, it would be best to try and keep your credit balance under $300. 

Credit mix: 

Simply paying off one line of credit in a timely manner will have positive effects on your credit score but could take some serious time before you ever actually see results. Having a more diverse mix of account types (credit cards, student loans, business loans etc.) will help improve your credit score—and do so in a more timely manner.

Hard inquiries: 

Hard inquiries appear on your credit report when you’ve applied for credit and a lender checks your report. These inquiries can affect your credit, especially if frequent but will only appear on the report temporarily. 

Negative instances: 

This one may seem a little obvious but any negative items on your credit report will also bring it down. These things include, but are not limited to: 

• House/business foreclosures 

• Bankruptcy 

• Charge-offs (when the lender has written the account off as a loss)

Credit score errors 

Although creditors and financial institutions usually run pretty tight ships, mistakes do happen with credit scores. 

Transunion, Experian and Equifax are the three main credit bureaus in the United States but the information they report isn’t always necessarily correct. False information or fraud can be detected here so be sure to thoroughly review whenever you do decide to go through with a credit check. 

Disputing errors 

If you do notice a mistake on your credit report, don’t worry too much. You have the right to dispute potential errors with any of the bureaus. 

Disputing errors can be done online through the bureau’s website or via letter. There are templates online for creating letters that are clear and concise. It is important to include all the valuable information you can, things like: 

• Bills

• Bank statements

• Financial notices 

And any other documents that may show the discrepancies between false your report and what actually happened.

If accepted, the error is then removed from the credit report with all other negative effects reversed. 

Adding statements to your report

If declined, you may request to add a statement regarding the dispute to be included in the report. This way, any business or individual inquiring about your credit will be able to hear your side of the story and will hopefully start a dialogue that could potentially benefit you. Adding a statement is usually free but may come with a small fee, depending on the credit bureau you use. 

How will overdraft affect my credit score? 

It won’t. 

Not immediately anyways. 

Overdraft fees are a function of checking accounts and because this money belongs to you and isn’t borrowed from someone else, credit bureaus aren’t really concerned. 

Just be sure to pay your fees and get your account back to above zero. 

Worst Case Scenario

Keeping your checking account in overdraft for too long could trigger your bank to enlist a collection agency, in which case, you would be reported to the credit bureaus, which would affect your credit score. 

Each bank has different rules and regulations regarding overdraft fees so be sure to do the proper research before signing up for them.