Overdrafts don’t mean you’re careless or irresponsible. This situation can happen to the best of us. We lose track of our expenses, and soon enough, that dreaded email shows up in our inbox to notify us about an overdraft.
The good news is that overdrafts should not affect your credit score. But the bad news is that they can result in hefty fees that may end up affecting your credit score. In this article, we’ll go over how to avoid them altogether.
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What causes an overdrawn account?
An overdrawn account is one that’s dipped into the negative and you’ve spent more than you have. That can happen when you write a check, buy something with a debit card, have money taken out through automatic bill payments, take too much out from the ATM, or make a withdrawal either electronically or in person.
Since many banks and credit unions offer what’s called overdraft protection, the bank will pay the bill for you even though you don’t have the money. The problem is, then you owe the bank not only the money spent, but also a fee accrued because of the overdraft.
How do overdraft fees affect credit?
In general, overdrafts will not affect your credit score, because they’re associated with your debit account rather than your credit. However, if you fail to pay back what you owe, the bank may turn to a collections agency. If an overdrawn bank account went to collections, your credit score will be impacted.
How to prevent overdrafts
With the right practices, you can feel confident about managing your money and avoiding steep and unnecessary overdraft fees. Start by following these suggestions.
Make a budget and stick to it
One of the most effective ways to avoid an overdrawn account is to start managing your finances and creating a budget. Start by identifying your short-term and long-term financial goals, like saving up for a vacation or a house.
Next, take a hard look at your monthly expenses. If you’re spending more than you’re bringing in, consider ways to make a bit extra on the side. Committing to your budget will take hard work, but it’ll be worth it.
Check your bank accounts daily
Checking on your accounts daily keeps you abreast of how close you are to having an overdrawn account. Plus, it helps you catch billing mistakes. You might find you’re being charged for a subscription service you thought you had canceled, or that your check didn’t process the day you expected. The best way to get in control is with frequent check-ins.
Keep in mind, deposits are not immediately available for use, so you can overdraw your account even if you just made a deposit. Checking your bank account to see when your deposit has fully processed will help you from overdrawing.
Automate your bills
Automating your bills will not only make sure you never miss a payment, but it will also help you keep track of the exact amount of money that is available for you to spend at any point in time. This will make it easier for you to avoid overdrafts on your account and avoid late fees on your bills.
But again, does overdraft affect credit score? The answer is no, but paying your bills late can be detrimental to your credit report overall.
Nowadays, you can automate your rent payments, cable bills, and more. Get in touch with your providers, either by phone or online, to ask about automating your payments. Some may even offer a discount for doing so!
Setting up automatic payments will make it easier to manage your finances and it might even cut out some unnecessary costs. However, be careful to make sure one of those automatic payments doesn’t become an overdraft fee of its own!
Avoid damaging your credit score with overdrafts
Unless your overdrawn bank account went to collections, you shouldn’t have to worry about overdraft fees affecting your credit score. However, those fees can still pile up and cause problems of their own. You can avoid overdraft fees by taking certain precautions, like making a budget, checking your accounts, and automating your bills.
What are the negative effects of overdrafts?
Overdrafts result in hefty fees, which can pile up quickly. If you don’t pay those fees along with the negative balance, you may find a collections agency coming after you, which does damage to your credit report.
Does a negative bank balance affect credit score?
At first, a negative bank balance will not affect your credit score, and the only penalty for an overdrawn account is a fee. However, if you fail to pay your bank or credit union back for the fee and payment it made on your behalf, the company could turn to a collections agency to recoup their money. That does affect your credit score.
Do bank accounts show up on credit reports?
No. Credit reports include financial information related to debt, so you can see loan and credit card accounts, but you will not see information about your checking or savings accounts.