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Do Overdrafts Affect Your Credit Score?

Janine DeVault

Mar 20, 2021 6 min read

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Do Overdrafts Affect Your Credit Score?
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    If you are living on a tight monthly budget, overdrafts offer some flexibility when you can’t quite make ends meet. Enabling overdrafts on your bank account can help you make transactions when your account is overdrawn.

    But does using overdrafts affect your credit score?

    Fortunately, using overdrafts doesn’t directly affect your credit score. Make sure you repay your overdraft and related fees, though. If you fail to repay your overdraft, it could be sent to collections, show up on your credit report, and negatively impact your credit score. In addition, an over-reliance on overdrafts could harm your financial health, even if it never shows up on your credit report.

    Below, we’ll dig into how using overdrafts impacts different factors related to your credit score. By reading the guide below, you’ll learn how to use your overdraft responsibly so you can avoid fees, protect your credit score, and maintain your overall financial health. 

    When it comes to overdrafts, your bank account, and your credit score, you should keep the following tips in mind:

    • Avoid unpaid bank fees from your overdrafts

    • Use cheques responsibly and avoid bounced cheques

    • Keep track of non-sufficient funds (NSFs) from auto-pay accounts

    • Be careful when you use credit as overdraft protection

    Not sure what your credit score is?

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    Avoid Unpaid Bank Fees

    Your bank won’t report the status of your accounts to credit bureaus unless they are sent to collections. If you carry an outstanding balance for a prolonged period, your account may become delinquent and be sent to a collection agency. You can avoid this by paying off your overdraft as soon as possible. An account that has been sent to collections will affect your credit score and remain on your credit report for 7 years

    There may be fees that you incur when you use your overdraft allowance. This is especially true if your account remains overdrawn for more than a few days. As such, it can cost extra to use your overdraft, making it tough to catch up with your payments.

    While an overdraft allowance comes in handy in a pinch, try not to rely on it too heavily so that you don’t rack up bank fees.

    Use Cheques Responsibly to Pay Your Credit Card Bills

    Paying your credit card bill with a cheque could affect your credit if you have a cheque rejected for non-sufficient funds (NSF). This is colloquially referred to as “bouncing a cheque.” 

    When there isn’t enough money in your account to cover the cheque, the cheque is rejected, your credit card bill remains unpaid, and your bank may charge an NSF fee when the cheque is returned. NSF fees typically range from $25 to $40.

    If you don’t make up the rejected payment in a timely fashion, the account could be sent to collections, at which point it will be reported to your credit bureau as a delinquency. 

    Accidentally bouncing a cheque once or twice isn’t likely to do serious damage to your credit report, especially if you resolve the payment in a timely fashion. However, banks use internal databases to track your account activity, including bounced cheques. Banks use this to inform future account decisions. Demonstrating a habit of bouncing cheques could make it harder for you to qualify for other financial products from your bank, including loans, credit cards, and mortgages.  

    Additionally, repeatedly bouncing cheques could result in multiple negative marks on your credit report and drive your credit score down. 

    If you pay credit card bills by cheque, it’s essential to ensure you have enough money in your account to cover them. Remember, it could take a few days for a cheque payment to be processed from your account. To avoid bouncing a cheque, always keep a close eye on your balance and limit your spending until you’re confident the payment has cleared.

    Keep Track of Non-Sufficient Funds Payees

    An NSF can also occur if your account doesn’t have sufficient funds to cover your pre-authorized transactions. If you pay your credit card or utility bills using automatic debit payments and there are not enough funds in the account to cover them, your bank will charge an NSF fee.

    At the same time, your bill remains unpaid. In some cases, such as digital subscriptions or utilities, the fee for late payment is very low. However, some companies, particularly credit card companies, charge hefty penalties and high interest rates for late payments. If the payment isn’t made in a timely manner, they may even send your account to collections.

    Again, any time an account is sent to collections, it will appear as a derogatory mark on your credit report and may lower your score. 

    With this in mind, be careful about relying on pre-authorized debit transactions. They are convenient, but they can also be tough to keep track of. If you are on a tight budget, create reminders for your pre-authorized debit transactions so you can ensure you have sufficient funds available. This way you can avoid NSF fees and having your account sent to collections. 

    Be Careful When You Use Credit as Overdraft Protection

    As we’ve discussed, non-sufficient funds can result in high fees, even if your account allows you to use overdraft. To avoid these fees, some accounts offer an overdraft protection feature in which you link a credit card to your chequing account to cover instances when you would otherwise overdraw your account.

    With this, any time you have non-sufficient funds for a transaction your credit card is charged rather than your overdraft. 

    This feature may seem convenient, but beware: In some cases, your credit card company may classify these types of payments as a cash advance. A cash advance from a credit card typically comes with a cash advance fee and a higher interest rate than other credit card transactions. Many times they don’t offer a grace period either, meaning you start paying interest immediately.

    While using credit as overdraft protection may seem like a way to avoid NSF fees, in many cases you wind up paying almost as much in interest and cash advance fees. 

    If you fail to keep up with your credit card payments, you will see negative marks on your credit report and your score may suffer. Additionally, any balance you carry on your credit card increases your credit utilization ratio, which in turn affects your credit score.

    Do Chequing Accounts Show up on a Credit Report? 

    Because chequing accounts don’t concern money that you’ve borrowed, they do not appear on credit reports. Even overdrafts aren’t reported to credit bureaus, unless they become delinquent.

    However, just because your overdraft history doesn’t show on your credit report, it can still affect your financial health. 

    Banks use their own databases to track details about your accounts, such as your reliance on your overdraft, your unpaid balances, bounced cheques, and other markers.

    If you consistently overdraw your account or bounce cheques banks may see it as an indicator that you are financially over-extended. As a result, they may deny you financial products such as personal loans, credit cards, or even additional bank accounts.

    While it’s always possible to improve your financial health, it’s best to avoid any derogatory markers in the first place. So, always do your best to keep your account in good standing, even if you know it won’t show on your credit report.  

    An overdraft is a handy feature that offers some flexibility when money is tight and saves you the embarrassment of having your card declined. However, if you rely on it too heavily you may find yourself paying excessive fees and it could even harm your credit score if you fall behind on your payments. 

    If you use overdraft, make sure you understand the fee structure and always pay your balances back promptly to avoid any negative repercussions.

    Janine DeVault
    Janine DeVault

    Janine is a writer who focuses on topics such as credit education, money management, and renting best practices for tenants and landlords. Janine loves to travel and has lived in Canada, the US, and Mexico.

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