Overdrafts are a credit that may be added to your checking account. You can take money out of your bank account or pay bills using that account even if there is no money. Let's imagine you need to pay a bill for £150 but only have £50 in your bank account. What are your options? If you can pay the charge because you have an overdraft, your current amount would be $100.
Your Credit Score Might Take A Hit If You Have Bounced Checks Or Obligations That Are Unpaid
An individual's credit score might suffer if their landlord, utility provider, or other creditor reports them for nonpayment of rent or other debts after they have bounced a check or other transaction to satisfy that debt. This may also occur if you ignore your financial obligations to the entity to whom you owe money.
If your bank decides to block a transaction or payment from your account to prevent a negative balance, or if you choose not to have overdraft protection, the check or payment will be returned unpaid.
Your Information Can Be Sent To Chexsystems
If a bank chooses to cover your overdraft rather than reject the transaction, you may be responsible for overdraft costs and additional penalties linked to the situation, such as a continuing negative balance charge if you don't get your account balance over $0. If you do not pay the overdraft or associated costs within a set time, your bank reserves the right to cancel your account, send the fees into collections, transmit your information to ChexSystems, or any combination of the three options.
There is no correlation between being in ChexSystems and a worse credit score; however, there is a correlation between being in ChexSystems and a lower credit score if you are sent to collections for failing to pay your overdraft fees. Because banks may see from your ChexSystems record that you have yet to pay fees in the past, having a record in ChexSystems might make it more difficult for you to create bank accounts for some time.
How To Avoid Future Overdraft Fees And Penalties
Look into your bank’s overdraft options
You may have access to several different options, such as overdraft lines of credit or free overdraft protection transfers. You also can waive the use of overdrafts completely; however, any transaction you attempt to make that might result in a negative balance on your account will be denied. If you choose this option, it will help you avoid being charged overdraft fees, but if you attempt to pay for anything and the transaction does not go through, it may cause you some trouble.
Sign up for low-balance alerts
There are a lot of banks out there that provide alert systems in the form of text messages or push notifications that will notify you if your balance falls below a certain level. These notifications help you be more careful about how much money you spend, or they can warn you when it's time to add additional money to your account.
If I Have An Overdraft, Will It Appear On My Credit Report?
Your credit record will reflect an overdraft as a debt if you allow it to occur. It will reflect a zero balance if you do not utilize your overdraft facility. If a person's account has gone into overdraft, the amount of money they owe will be shown on their credit report.
Your usage of an overdraft may not show up on your credit report if you only make infrequent withdrawals from your overdraft account and if the amount is paid off at the end of each month when you are paid. This is because the majority of financial institutions, such as banks and building societies, only submit information to credit reference organizations once each month. This is often how your bank account will seem on that particular day; nevertheless, it may overlook the brief usage of your overdraft.
Does Going Over Your Overdraft Limit Affect Your Credit Rating?
Your bank will review your credit history if you request an increase in your overdraft. This is done to determine whether or not you will be a responsible borrower in the future. Many companies accomplish this via what is known as a "soft search" or "soft credit check," which does not appear on your credit report when it is sent to potential lenders.
However, certain banks will do a thorough search. This will be recorded on your credit report, but it is not likely to have a negative impact on your credit rating. It will only affect your credit score if you apply for a lot of credit in a short period; even then, it may not. If you do this, you may be experiencing financial difficulties with a lender.
