Do Overdraft Fees Affect Your Credit Score?

Overdraft fees are common, leading to questions about their financial implications and impact on credit. Understanding the relationship between bank activity, overdrafts, and credit reports is important. This article clarifies how overdrafts relate to credit reports and scores.

Overdrafts and Your Credit Report

A typical overdraft, where a checking account balance goes below zero, generally does not appear on a consumer’s credit report. This is because deposit accounts, such as checking and savings accounts, differ from credit accounts. Banks do not routinely report day-to-day activity of these deposit accounts, including isolated overdrafts, to major credit bureaus like Experian, Equifax, or TransUnion. Since traditional credit reports track borrowing and repayment, a single overdraft incident does not directly influence your credit score.

While major credit bureaus do not track checking account overdrafts, specialized consumer reporting agencies like ChexSystems monitor deposit account activity. These agencies report information related to closed accounts, unpaid fees, or other banking irregularities. If a bank denies a new checking or savings account, it may be due to negative information from these specialized reports, not a traditional credit report. This highlights that banking history is usually separate from credit history.

When Overdrafts Can Affect Credit

An overdraft can indirectly affect your credit score if the unpaid negative balance becomes severely delinquent. This occurs when the bank exhausts its collection efforts, closes the account, and sells the debt to a third-party collections agency. It is the collections account, not the original overdraft, that is reported to major credit bureaus. This can significantly damage your credit score, as collection accounts are serious negative marks.

A bank typically sends an account to collections after 90 to 180 days of non-payment. Once a collection account appears on your credit report, it can remain there for up to seven years from the date of the first missed payment. Even if the debt is paid, the collection entry remains, signaling past financial difficulty to potential lenders.

How Credit Reports Are Used

Credit reports summarize an individual’s financial reliability. They detail a person’s history with various credit products, including credit cards, mortgages, and auto loans. Information includes credit limits, current balances, and payment history. Lenders, landlords, and some employers use these reports to assess financial trustworthiness and predict repayment behavior.

Credit scores, three-digit numbers, are generated from data within credit reports. They provide a quick, standardized measure of credit risk. Key components influencing a score include payment history, debt owed, length of credit history, new credit applications, and types of credit accounts. A higher credit score indicates lower risk to lenders, potentially leading to better loan terms.

Differences Between Bank and Credit Accounts

A fundamental distinction exists between deposit and credit accounts. Deposit accounts, like checking and savings, hold an individual’s own funds and are not typically reported to major credit bureaus. Credit accounts, conversely, involve borrowed money that must be repaid. Activity on these accounts, such as payment history and balances, is regularly reported to credit bureaus because it reflects debt management. This separation explains why a basic overdraft rarely appears on a credit report, while a missed loan payment does.