There may be a time when you need your bank to spot you some extra money to cover a transaction. Your financial institution has your back when you have a bank account with overdraft protection. They will allow the transaction to go through even if you do not have enough money available in your account.
Overdraft protection is an excellent service, but there is a potential it will harm your credit score. Keep reading to understand overdrafts and how to shield your credit score from overdraft fees.
What is an Overdraft?
In short, an overdraft is an overdrawn checking account. An overdraft occurs when an ATM cash withdrawal, a debit card purchase, or a check exceeds the amount of money in your checking account, but the bank still approves the transaction. The bank or credit union gives you a temporary loan to cover the excess amount.
You must have overdraft protection services through your financial institution to prevent a bounced check or a transaction from being declined due to insufficient funds. TDECU has Courtesy Pay available for Members in good standing, and Federal regulations require it to be available on an opt-in basis.
There are several ways your bank can set up overdraft protection to provide the additional money you need to cover a transaction.
The account can:
- Pull money from another account at the same bank, including your savings account or a secondary checking account
- Access a line of credit you established specifically for overdraft protection
- Link one of your credit cards to the checking account
- Use the bank’s money
Without overdraft protection, a transaction that takes your account to a negative balance may result in a non-sufficient fund (NSF) fee, and the transaction will be declined.
Overdraft protection also typically comes with its own set of fees. However, if you opt into overdraft protection, TDECU does not charge for overdraft protection unless you utilize it.
Overdraft Fees Explained
What is the effect of overdraft fees on your credit score? Protect your accounts with TDECU’s Overdraft Protection Services
Each time you overdraw your account, overdraft protection kicks in, and with it comes overdraft fees. Every overdraft transaction includes an overdraft fee, often as much as $35 per transaction. For example, if you have a zero account balance and conduct multiple transactions in a single day, each transaction could generate a separate overdraft fee.
You will also incur interest charges when you use a line of credit or credit card for protection. The Consumer Financial Protection Bureau warns against using credit cards for overdraft protection because credit card companies view the transaction as a cash advance resulting in a cash advance fee and a higher interest rate.
Do Overdraft Fees Affect My Credit Score?
Not directly, but account overdrafts can indirectly affect your credit.
Your payment history for credit cards, personal loans, mortgages, etc., are all reported to the major credit bureaus, including Experian and Transunion, and comprise the credit history portion of your credit report. Since your bank accounts do not include borrowing from and repaying a lender, they are not part of your credit report, even if you incur an overdraft fee.
However, if you use the bank’s money for overdraft protection, you must pay back the amount the bank covers, the overdraft fees, and any interest charges incurred. If you do not pay the fees fully and on time, the financial institution can send your debt to a collection agency. At this point, you owe a lender, the bank, resulting in an entry on your credit report and a drop in your credit score (FICO score).
Similarly, prompt payment for any charges on your credit card used for overdraft protection must be paid promptly to prevent a late payment notice from lowering your credit score.
Banks can rescind overdraft protection or close your account if you routinely overdraw. ChexSystems, a consumer reporting agency under the Fair Credit Reporting Act, assesses a person’s risk as a bank customer based on information regarding closed checking and savings accounts. Excessive overdrafts could impact your ability to open a new bank account.
Monitor Your Credit Score
Know your credit score before the results of a routine credit check catch you off guard. Request your free credit score report from annualcreditreport.com.
Find more information about managing your credit score in the Personal Finances section of TDECU’s Advice Center today.