Credit Building Tips

Does A Bank Overdraft Affect Your Credit Score?

Shaun Connell
April 14, 2023

Your checking account is a central part of your financial life. For this reason, you might assume that overdrawing your account could have an impact on your credit score.

The truth is, though, that normal day-to-day use of your checking account won't show up on your credit report as you aren't spending money that you borrowed from someone else. Instead, when you use a debit card, write a check, use an ATM, or otherwise use your checking account, you're simply drawing upon your own stash of cash.

Solution iconBank overdrafts and other checking account activity won't appear on your credit report. However, if you do not pay your overdraft fees or return your account to a positive balance after an overdraft, the debt can be sent to collections. Collection accounts appear on your credit report and can have a serious impact on your credit score.

Let's take a look at what you need to know about overdraft fees and your credit score to ensure that your score stays as healthy as possible.

Will My Checking Account Show Up on My Credit Report?

Your credit report displays information about your current credit situation and your credit activity. This means that information about your credit card accounts will show up on your credit report, including 30 day late payments.

However, a debit card isn't using money that you're borrowing-- it's taking money out of the checking account you have with a bank.

person using debit card to shop online with overdraft protection

This means that checking accounts aren't one of the accounts that are listed on your credit report. The same is true when you use a debit card to withdraw money from an ATM, write a check, withdraw money in person, or have automatic payments withdrawn from your checking account.

When you use a debit card, you aren't borrowing money from anyone but instead using the money you have in your checking account. This means that checking accounts don't show up on credit reports.

Information about your checking accounts won't appear on your credit report unless a financial institution sends your account to collections for unpaid overdraft fees or negative balances.

What Is an Overdraft?

When you make a payment using your checking account, but there isn't enough money in your bank account to cover the cost, banks will sometimes still pay the transaction.

woman using atm to overdraw account

There are a number of ways you can overdraw your checking account, such as through debit card, ATM transactions, checks, electronic or in-person withdrawals, or automatic bill payments.

There are lots of banks and credit unions that offer programs known as overdraft protection programs.

  • This means that the financial institution will pay for the transaction you are making but charge you an additional fee (plus they will require you to repay the money that they covered.)

Does a Bank Overdraft Affect My Credit Score?

If you spend more money than there is in your checking account and your bank covers it, you might incur an overdraft fee.

  • However, this overdraft won't appear on your credit report.

It's worth knowing that there is an organization called ChexSystems-- a bank reporting bureau-- that does keep an eye on your checking and savings accounts with credit unions and banks.

Items like overdrafts, unpaid negative balances, bounce checks, fraud related to your account, or involuntary account closures will be tracked by ChexSystems.

If your ChexSystems report shows that you have used bank and credit union accounts irresponsibly in the past, you could be denied when you apply to open a new bank account.

If you're denied opening a new bank account because of your ChexSystems report, this can obviously cause a number of problems for you financially. That being said, it won't impact your ability to get a new credit card or take out a loan, and it won't affect your credit score.

There is one circumstance where your credit score could be hurt by an overdraft-- if it is sent to a collection agency.

Are you worried you won't qualify for a loan because you have too many recent hard inquiries on your credit report? Check out this guide to removing hard inquiries from your report.

What Happens If Your Overdraft Is Sent to Collections

If your bank or credit union covers the cost of a transaction for you via overdraft protection, you will have fees and a negative balance to pay. If you pay these, it won't have any impact on your credit score.

However, if you don't pay the fees or your negative balance, the financial institution might send your debt to a collection agency. Once an account has been created for you with a debt collector, it can end up appearing on your credit report.

  • Accounts in collection will show up on your credit report and will remain there for seven years. This is true no matter how large or small the amount of money you owe is.

It's, therefore, essential that you cover any negative balances you have as well as any overdraft fees right away. This is the only way to avoid the account being sent to collections.

If your credit dropped dramatically over a short period of time, check out our post about why you might experience a large drop in your credit score.

How Collections Accounts Impact Your Credit Score

It will negatively impact your credit score if your account is sent to collections for unpaid overdraft fees or negative balances.

  • It's not just your bank that can send accounts to collections-- if you bounce a check trying to pay a utility company, landlord, creditor, or someone else, and you don't remedy the situation, they can report you to the credit bureaus.

The longer you have unpaid debt in collections, the more derogatory marks you will accrue on your report. This is because late payments appear in a number of categories, such as 30-day, 60-day, and 120-day late payments.

Having a debt in collections is one of the most severe derogatory marks you can have on your credit report. This is because the original creditor has written off recouping the debt and has passed it off to a collection agency.

The best way to avoid this situation is to make sure your accounts are current before they get to the point of reaching collections. Ideally, any money you owe will be paid before thirty days have passed, as financial institutions usually report to credit bureaus once payment is thirty days late.

If you already have debts in collections, make sure you check out our post about how to delete collections from your credit report.

Should I Use Overdraft Protection?

Overdraft protection can be a useful safety net, but you might choose to opt out of the program if you are consistently overdrawing your bank account. This is because it can mean paying a lot of money in overdraft fees in aggregate.

  • Of course, if you opt out of overdraft protection, it means that transactions will be declined when you don't have enough money to cover it in your checking account.

Though this can be uncomfortable or embarrassing when you go to make a purchase, it does mean that you aren't racking up overdraft fees.

Another thing you can do to provide overdraft protection for yourself is to link your checking account with a savings account. If you don't have enough money in your checking account to cover a purchase, the money will be moved from the account that you linked to your checking account.

It's worth noting that your bank might still charge you a fee for moving money from a savings account to a checking account to cover the cost of the transaction. In most cases, though, the fee is much lower for linked accounts than when the bank or credit union is covering the cost for you.

How to Avoid Overdrafts

Avoiding overdrafts is the best way to avoid negative marks on your ChexSystems report as well as the potential for your account to be sent to collections for unpaid negative balances or overdraft fees.

Consider the Options Your Bank Offers

Many banks and credit unions offer a number of different options for overdraft protection.

For example, some offer:

  • overdraft lines of credit
  • overdraft protection transfers.

If you are frequently incurring overdraft fees, the best choice might be to opt out of overdraft protection completely. Though this means that your transaction will be declined, it does ensure that you aren't spending money you can't afford to pay back.

Sign Up to Be Alerted When You Have a Low Balance

One useful tool you can use to avoid overdrafts is to sign up for an alert system if your bank offers one.

  • This type of program can send you push notifications or texts if your balance has fallen below a specific dollar amount.

Low balance alerts can help you stay aware of when you might not have enough money in your account to cover a transaction. This can either indicate to you that it's time to transfer money into your account or to slow down on your spending.

Are you suffering from imperfect credit because someone stole your identity? Make sure you check out our recent post about how to repair your credit after identity theft and fraud.

Open a Checking Account With No Overdraft Fees

A number of major banks in the United States have begun implementing policies to eliminate overdraft fees.

These include:

  • Wells Fargo
  • U.S. Bank
  • Bank of America
  • Citibank

Other banks have started introducing new financial products without overdraft fees.

You might find that opening a checking account with one of these institutions is a useful strategy. Make sure you take a look at our list of the best "no overdraft fee" checking accounts.

Final Thoughts on Overdrafts and Credit Scores

Though overdrawing your checking account might not have a direct impact on your credit score, there are still a lot of reasons why you want to avoid spending more money than you have in your checking account.

  • Not only can too many overdrafts and other negative marks have an impact on your ChexSystems report and your ability to open a bank account in the future, but overdraft fees can really start to add up.

Beyond that, if you don't settle a debt you owe to a bank for accrued overdraft fees or negative balances, the debt can end up being sent to collections. This will almost certainly have a negative impact on your credit score and make you seem like a riskier borrower to lenders.

For these reasons, it's generally a good idea to come up with a plan to avoid overdrawing your checking account. If you do end up spending more than you have in your account and your bank covers the cost, make sure you bring your account back to a positive balance and pay any overdraft fees right away. This way, you can avoid them being sent to collections.

Is it time for you to improve your credit score and clean up your credit report? Make sure you check out our credit-building tips blog for more resources that will help you boost your credit.

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Written By:
Shaun Connell
Shaun Connell is a personal finance and credit expert with a passion for helping individuals eliminate debt and improve their credit. He's enjoyed writing investing and financial content for over 15 years, with expertise in real estate, debt, banking, credit, and wealth building. His work has been seen by millions on the web.

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