Does Going Negative Affect Credit Score?

Does Going Negative Affect Credit Score?

Going negative in a bank account, often referred to as an overdraft, occurs when transactions or withdrawals exceed the available funds, resulting in a balance below zero. This creates a debt owed to the financial institution. While a negative bank balance does not directly appear on credit reports, its repercussions can indirectly influence an individual’s credit standing.

Understanding Credit Scores and Bank Accounts

A credit score is a numerical representation of an individual’s creditworthiness, used by lenders to evaluate the risk associated with extending credit. These scores are primarily determined by information found in credit reports, which are maintained by the three major consumer credit bureaus: Experian, Equifax, and TransUnion. Key factors influencing a credit score include payment history, amounts owed, length of credit history, new credit, and the mix of credit types.

Standard checking and savings account activities, such as deposits, withdrawals, and maintaining positive balances, are generally not reported to these credit bureaus. This means that simply having a bank account or even a minor, promptly resolved overdraft does not directly appear on a credit report or influence one’s credit score. Unlike credit products where borrowing and repayment are tracked, a bank account functions as a place to hold and manage one’s own money, separating it from traditional credit obligations.

How Negative Balances Can Affect Credit Indirectly

While a negative bank balance itself does not directly appear on a credit report, it can trigger a series of events that ultimately harm one’s credit standing. An initial overdraft immediately leads to fees imposed by the bank, which can range from approximately $25 to $35 per occurrence. These fees can quickly accumulate, transforming a small negative balance into a larger, more significant debt. If this debt, including the original negative balance and associated fees, remains unpaid, the bank will seek to recover it.

Should the negative balance persist, banks typically close accounts that remain overdrawn for an extended period. While the account closure itself is not reported to the major credit bureaus, it can create difficulties for the individual in establishing future banking relationships. A history of account mismanagement can be recorded by specialized consumer reporting agencies that track banking behavior.

The most significant indirect impact on a credit score occurs when an unpaid negative balance is sent to a collection agency. If the bank cannot recover the outstanding debt and fees, they may sell the debt to a third-party collection agency. Once a debt is placed with or sold to a collection agency, it is likely reported to the three major credit bureaus. A collection account appearing on a credit report is a significant negative mark that can substantially lower credit scores and typically remains on the report for seven years from the date the original debt first became delinquent.

Beyond the major credit bureaus, a negative bank balance can impact an individual’s financial standing through specialized reporting systems like ChexSystems. ChexSystems is a consumer reporting agency that tracks banking account activity, including instances of unpaid overdrafts, bounced checks, and involuntary account closures due to mismanagement. A negative report with ChexSystems, which can remain for up to five years, can make it challenging or impossible to open new checking or savings accounts at other financial institutions. Although ChexSystems does not directly influence credit scores, the inability to access basic banking services can indirectly hinder financial management, potentially making it harder to pay bills on time.

Strategies to Avoid Negative Balances

Preventing a bank account from going negative involves proactive financial management. Regularly monitoring account balances is a fundamental step, allowing individuals to track available funds and anticipate expenses. Many financial institutions offer low balance alerts, which can be set up via email or text message to notify account holders when their balance drops below a predetermined threshold, providing an opportunity to take corrective action.

Another effective strategy is to link a savings account or a line of credit for overdraft protection. This arrangement automatically transfers funds from the linked account to cover transactions that would otherwise overdraw the checking account, often for a lower fee than a standard overdraft charge. Maintaining a small financial buffer in a checking account, such as an extra $100-$200 beyond anticipated expenses, also provides a cushion against unexpected debits. Budgeting and tracking expenses can help ensure spending remains within available funds, minimizing the risk of a negative balance.

Steps to Take After Going Negative

If a bank account has gone negative, immediate action is important to mitigate potential consequences. The first step involves contacting the bank to understand the exact negative balance and any associated fees. Promptly paying off the negative balance and all fees is crucial to prevent the situation from escalating. Many banks may be willing to waive initial overdraft fees, especially if it is a first-time occurrence or if the account holder has a history of responsible banking.

If the debt is substantial, negotiating with the bank for a fee waiver or a repayment plan can be a viable option. Should the negative balance already be sent to a collection agency, address the collection account directly. This involves verifying the legitimacy of the debt with the collection agency and potentially negotiating a settlement amount. Resolving the debt, even if it has gone to collections, is essential to minimize its long-term impact on one’s credit report.