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If you've ever overdrawn your checking account, you know that cringeworthy feeling, especially if you were then hit by a steep fee. But if you're stressed about how an overdraft will impact your overall financial health, take a deep breath: Checking account overdrafts don't directly affect your credit score. They can, however, indirectly affect your credit if you don't pay what you owe.
Do Checking Accounts Appear on a Credit Report?
Every credit card and loan you have appears on your credit report to indicate you're borrowing and repaying money to a lender. But a debit card pulls from money in a checking account—you're not borrowing from anyone. For that reason, checking accounts aren't included on credit reports.
That means even if you spend more than what you have in your account and incur an overdraft fee, the overdraft will not appear on your credit report. Phew.
Be aware, however, that there is a banking reporting bureau called ChexSystems that keeps tabs on your deposit accounts with banks and credit unions. Your account activity is tracked, including items such as overdrafts, bounced checks, unpaid negative balances, involuntary account closure as well as any fraud related to your card, account or an ATM.
When you apply to open a new bank account, you could be denied if your ChexSystems report shows a history of repeated irresponsible account use. But that doesn't affect your credit or ability to take out a loan or credit card. You should also know that there are ways to clean up your ChexSystems report, and some banks offer second-chance accounts where they're willing to either not use ChexSystems or overlook more dings than they usually do.
Should I Keep My Overdraft Protection?
If you tend to frequently overdraw your bank account and are paying a lot of money in overdraft fees every month, you might consider opting out of overdraft protection. Just know that this means if you try to make a purchase with your debit card and don't have the funds available in your account, the transaction will be declined. Yes, this could mean a little embarrassment at the checkout counter, but it will keep you from incurring expensive overdraft fees.
A better solution may be to link a savings account to your checking account as a form of overdraft protection. In this case, if you have insufficient funds in your checking account when you go to make a purchase, the amount will be pulled from the linked account. You won't be declined, but your bank will likely still charge you a fee—though a much lower one than on an overdraft not connected with a savings account.
How an Overdraft May Impact Your Credit
There is one instance in which an overdraft can hurt your credit: if it's sent to collections. If you pay the fees and negative balance after an overdraft, you'll be fine. But if you don't pay back what you owe, the financial institution can send that debt to collections. Once a collection agency creates an account for you, it can go on your credit report.
Anytime an account goes to collections, no matter how big or small, it's indicated on your credit report as a delinquency and will stay there for seven years. So make sure to pay back the overdrawn balance and fees as soon as possible to avoid this scenario.
Avoiding collections and knowing what other factors affect credit can keep your finances in good shape:
- Payment history: This makes up the biggest part of your credit score, so any late or missed payments will negatively affect your credit.
- Credit utilization: Creditors prefer that you not use more than 30% of your available credit at any given time, so try to keep your balances reasonably low.
- Credit mix: Diversity in your account types, such as credit cards and loans, shows your history with various kinds of debts and can help your credit score.
- Hard inquiries: These appear on your credit report when you've applied for credit and a lender has checked your report. These inquiries can temporarily ding your credit score, especially if you have many of them in a short time.
- Negative information: Items like charge-offs, foreclosures, bankruptcies and debts in collections can bring down your credit score.
Another Way to Improve Your Credit Score
If you're reading this article, chances are you have concerns about keeping your credit score as high as possible. While service accounts such as phone utility bills historically have not factored into credit scores, Experian Boost™† now lets you get credit for on-time payments made on your utility and telecom accounts. If you're good about paying your bills on time, you may enjoy a quick improvement to your FICO® Score☉ .