Debt Management

Does an overdraft affect your credit score?

Overdrawing a bank account can happen to anyone, regardless of their earnings. For example, one may have a delay in depositing money into their bank after having an automatic withdrawal.

But what happens when you overdraw your bank account? What are the possible direct (or indirect) effects of an overdraft on your credit?

What is an overdraft?

“Overdraft” is the term when any There are not enough funds in the account to cover the expenses. At the time of return (i.e. by automatic payment or check). What happens when an account is overdrawn depends on the bank/lender’s policies.

For example, a bank may decline a transaction and charge the account owner a non-sufficient funds (NSF) fee. NSF fees can be quite high—most Canadian financial institutions charge $45 per transaction. In this case, not only will your transaction not go through (resulting in an unpaid loan), but you will owe an additional $45 to your financial institution.

If you have overdraft protection, overdrawing your account works a little differently.

What is overdraft protection and how does it work?

Overdraft protection is an optional service that allows you to overdraw your bank account balance if you do not have enough funds to cover a financial transaction. The bank lends you the amount you owe. This debit can cover transactions such as purchases, bill payments, checks, withdrawals, and bank account transfers. This can help you avoid bounced transactions and NSF fees.

If you’ve signed up for overdraft protection with your financial institution, your bank will provide a small “loan” to complete the purchase. To get overdraft protection, you must apply through a credit application. If you get approved, the bank will set your limit based on your creditworthiness and when you go into overdraft, the bank will charge you an overdraft fee, usually around $5, and an applicable Overdraft will charge interest.

Some banks may have a form of overdraft protection that allows you to link your account to another financial product and withdraw money from that other product to cover the overdraft. For example, if you have both a checking and savings account at the same bank, they may have a policy that uses the balance in your savings account to cover overdrafts in your checking account. Will do. Another financial product you can link would be a line of credit. The bank may charge a fee for this service—although this varies from bank to bank and even from one type of linked financial product to another.

How are overdrafts done?

An overdraft can happen for a variety of reasons. For example:

  • Making purchases under the assumption that the deposit has cleared when it has not.
  • Forget about an outstanding check that hasn’t been cashed yet when making a purchase from the same account.
  • Sudden and unexpected emergencies that cost more than what you have in your emergency fund.
  • Auto-renewal of subscription services or late payments that you forget about due to how much money you have available.
  • False or fraudulent charges that you couldn’t account for because you didn’t know about them or how much they were.

These are just a few situations that can cause an overdraft. In some cases, you can work with your bank to resolve the overdraft and avoid the fee—especially if you can show that the charge was false or fraudulent.

Overdraft and Credit Score: Direct Impact

What happens to your credit score if you go into overdraft? The short answer is nothing. An overdraft won’t have an immediate impact on your credit score.

If you have a form of overdraft protection that covers extra costs so your account doesn’t go into default—or if you’re able to pay back the missing amount before your banking statement expires—you should not see any effect on it. Your credit score from an overdraft.

“While it can be helpful, it’s important not to rely on overdrafts because they are a form of credit. Relying on overdrafts regularly is a warning sign that you’re not in line with your budget. Find yourself relying on overdraft protection, so go back to the “ABCs” of budgeting – analyze, brainstorm, change. Analyze your spending by listing all your expenses. Cut spending and/or Brainstorm ideas to increase income. Change your expenses and/or income based on what you want to do with your brainstorming.”

– Becky Western-McFadyen, Financial Coaching Manager, Credit Canada

Indirect consequences of overdraft

While overdraft or NSF fees don’t have an immediate and direct impact on your credit score, they can Indirectly Effects of having insufficient funds in your account.

Bank balances are being sent for collection.

For example, if your account has a negative balance for a very long time (typically 60-90 days), it may be sent to collections. This will appear as a negative event on your credit history and lower your credit score.

To avoid this, it is important to pay back the overdrawn bank balance as soon as possible.

Unpaid debt from bounced cheques/card transactions

Say you write a check that bounces due to insufficient funds. A bounced check will not be self-reported to the credit bureaus. However, unpaid balances can be reported to the credit bureaus as outstanding debt and can hurt your credit score.

If your bank reports that a check has bounced and you still haven’t heard from the business you sent the check to, contact them as soon as possible to make alternative payment arrangements. do

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7 Tips to Manage Overdrafts Effectively

So, what can you do to avoid overdrafts and reduce the impact of overdrafts on your credit score? Here are some tips that may help:

1: Ask what kind of protection your bank offers.

When creating a new bank account, check to see what type of overdraft protection is available with the product. For example, can you set up automatic transfers from a savings account to a checking account? What is the overdraft protection fee?

Knowing how overdrafts work on your bank account can help you avoid or prepare for any associated costs or implications.

2: Track your monthly income and expenses.

The best way to deal with overdrafts is to avoid them in the first place. One way to do this is to use a budget planning and expense tracking tool to verify how much you make each month versus how much you spend (and what you spend it on). spend).

This can help you more accurately assess how sustainable your current spending habits are and identify areas where you can make cuts. Knowing this can help you avoid overdrafts because it gives you the strength to ask yourself, “Can I really afford this?” And there is an obvious answer.

3: Cancel auto-renewing subscriptions.

How many subscriptions do you have that renew each month for services you don’t use? Multiple small transactions can cost you quite a bit when you’re in an overdraft. For example, say your bank has a $5 account overdraft fee for each transaction that occurs when your account balance is negative.

While you’re waiting for the deposit to clear, each transaction will cost you an extra $5 — instead of a $9.99 Netflix subscription for $14.99.

4: Create a monthly budget and stick to it

After tracking your income and expenses, create a monthly budget of what to spend and what to spend on so that all your needs are met, and your debt is paid off. Any money left over after meeting your needs can be put aside for your savings, investments, or your “rainy day” fund.

Keep track of how the prices of the goods you buy change over time. That way, you can adjust your budget to account for inflation in these expenses.

5: Follow up with companies after receiving NSF notification.

Odds are, if a transaction is declined due to insufficient funds, the company you’re dealing with will let you know. However, it’s easy to miss an email or lose a message in your voicemail inbox. So, when you receive an alert from your bank informing you that a transaction has been declined, it’s important to check who the transaction was for and the business to resolve the issue. It is important to follow up with

For example, say a loan payment is missed due to insufficient funds. By proactively reaching out to the creditor, you can take care of payment or make alternative arrangements before the bill becomes delinquent and damages your credit score.

6: Check your bank balance and transaction history frequently.

Before making a big purchase, log in and check your current bank account balance and recent transaction history.

Frequently checking your bank account online and verifying that it reflects your most recent transactions before you make a purchase can help you avoid accidentally overdrawing your account.

7: Fight fraud allegations as soon as possible.

If you see a charge on your bank account that you know you didn’t authorize, dispute it as soon as possible. If necessary, contact your bank and ask them to change your credit/debit card to prevent the fraudster from making further charges to your account that could cause you to go into overdraft.

The sooner you do this, the better, as it helps you avoid erroneous fees. Also, if you incur an overdraft fee due to fraud, your bank should work with you to remove the fee from your account. You shall not be held liable for transactions that you have not made or approved..


Monitoring your bank accounts to confirm that you have enough money to cover your expenses — and identifying ways to reduce your spending based on your income and essential expenses — can prevent overdrafts. Can be an invaluable way to avoid the problem. While an overdraft does not directly affect your credit score, a negative bank balance or insufficient funds does not cause significant payments. can do Affect your credit score.

Managing your finances is the best way to prevent overdrafts and save money to get out (and stay) out of debt while boosting your credit score.

If you find that you’re constantly going into overdraft on your bank account or struggling to keep up with your minimum monthly payments on your loans, help is available. Contact Credit Canada for information about your debt relief options and how you can live a debt-free life.

Man is smiling and chatting with a credit counselor on his phone.

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