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So, how does overdraft affect credit score? If you have a current account, you might be able to access an overdraft. Having an extra financial cushion can be beneficial. But, is overdraft always beneficial, or can it harm your credit score? How does overdraft affect credit score?
Continue reading to learn more about overdrafts and how does overdraft affect credit score.
What Is An Overdraft?
An overdraft occurs when you spend more money than you have in your account. If you have an overdraft, you will have to pay fees. An overdraft differs from a loan in that you must repay the money plus interest with a loan. With an overdraft, you only have to pay the fees.
What Is A Credit Score?
Your credit score is a numerical representation of your creditworthiness. This choice is based on your credit history, which is a record of your borrowing and repayment patterns. Your score enhances the likelihood that you will be accepted for loans and credit cards. Receiving new credit may be difficult if your score is poor.
Credit report information, which is often sourced from credit bureaus, makes up the majority of a credit score. Lenders use credit ratings to assess the possibility that a borrower will make loan repayments on schedule.
Does Overdraft Affect Credit Score?
So, does overdraft affect credit score? Yes, overdrafts will affect your credit score. An overdraft occurs when you spend more money than you have in your account. This can happen if you write a check for more money than you have, or if you use your debit card to make a purchase when there is not enough money in your account. An overdraft can also happen if you have automatic payments set up and there is not enough money in your account to cover the payment. If an overdraft occurs, your bank will likely charge you a fee.
How Does Overdraft Affect Credit Score?
Overdraft your checking account can have more consequences than just costly fees. It can also affect your credit score. Since your checking account is not typically shown on your credit report, overdrafts in your checking account are not recorded. However, it doesn’t mean that over-drafting can’t harm you.
When you overdraw your account, your bank may report the event to the major credit bureaus. If this happens, it will likely show up on your credit report as a negative item. This can lead to a lower credit score.
Your credit reports contain a comprehensive list of all of your debts, including overdrafts. Based on your prior overdrafts and payments, potential new lenders can estimate your accountability.
Banks and other financial organizations send information to credit bureaus every month, whether or not you have used your overdraft. Therefore, if you used an overdraft but paid it off at the end of the month, it might appear on your credit record as a zero balance. So, depending on how your bank account is configured on the day, an overdraft may or may not affect your credit score.
So, if you have used an unauthorized overdraft or skipped payments and the bank charged you fees for it, this will have a negative effect on your credit report.
An overdraft may have the following effects on your credit score:
- If you regularly avoid paying your overdraft balance at the end of each month or pay only the minimum amount due, your credit score will suffer.
- If you regularly max out your overdraft, the credit bureaus will lower your credit score because it indicates heavy credit utilization. Maintain a low credit-to-debit ratio to raise your credit score.
- If you utilize unauthorized overdrafts, you can be required to pay banks a high-interest rate, which could set you up for a debt trap.
The Difference Between An Authorized And Unauthorized Overdraft
An authorized overdraft is when you have given your bank permission to cover any checks or electronic payments that exceed your account balance.
An unauthorized overdraft occurs when you have not given your bank permission to cover these payments and they are returned unpaid.
The main difference between the two is that with an authorized overdraft, you will usually be charged a fee, while with an unauthorized overdraft, you will be charged a higher fee and may also be subject to additional penalties.
How To Avoid An Overdraft?
When your checking account balance dips below zero, you’ll likely incur an overdraft fee from your bank. Overdraft fees are typically around $34 per transaction, and if you have more than one overdraft in a single day, you could be charged multiple fees. If you frequently find yourself with an empty checking account, there are a few steps you can take to avoid racking up costly overdraft fees.
One way to avoid an overdraft fee is to make sure you have enough money in your bank account to cover any transactions that may occur. If you don’t have enough money in your account, try to get a loan from a friend or family member. Another way to avoid an overdraft fee is to only spend what you have on hand. If you need to withdraw more money than you have in your account, try using a debit card instead of a checking account.
Overdraft fees can be a real pain, especially if you’re already tight on cash. So, here are a few tips to help you avoid those pesky fees:
- Keep track of your account balance. This seems like a no-brainer, but it’s important to stay on top of things.
- Set up account alerts. That way, you’ll know right away if you’re getting close to your limit.
- Only use authorized debit and credit cards, and never let your account go past the zero balance.
Though an overdraft will not have a direct impact on your credit score, if you consistently overdraw your account, your bank may close your account and report the negative information to the credit bureaus. This can then lower your credit score. To avoid this, be sure to keep track of your account balance and always have enough money to cover any potential overdrafts. Therefore, aim to maintain a clean account credit history and stop worrying too much about how does overdraft affect credit score.