What is bank overdraft? How does it work? How does it affect our credit score? Can this be avoided? Will the bank report this immediately to credit bureaus?
Bank overdraft happens when we exceeded our spending based on the money that we have in our checking account. Depending on the bank’s terms and conditions, the bank will allow us to use more than what we have but we will be paying for an overdraft fee.
This is the same situation if you have a credit card, if you spend more than your credit limit, you will be assessed with an over limit fee. For credit cards, we have what we call cycle dates, the beginning and closing date.
Once you have gone over the limit, you can prevent this from being reported to credit bureaus if you make a payment to bring down the balance before the statement cycle ends. Every cycle end date, the information that are being reported include the balance (the amount you owe), the payment you made, when did you pay the account, and so on. So that means, if your balance is over than the spending limit, it will negatively affect your credit score.
Regarding bank overdraft, the bank will contact you to make you aware that there is an overdraft amount and will request you to pay for it right away, if not, it will be reported and hurt your credit score. There are also cases that bank companies will charge you an overdraft fee each day that the account is overdraft.
How does it affect your credit score?
The effect of overdraft on your credit score will depend on how you urgently take care of it. Whenever you have an overdraft amount, just make sure, you pay for it before the cycle end date, so it will not hurt your credit score. But if you will let it pass and remain your account with the overdraft amount then, the more your credit will suffer.
Can this be avoided?
Yes, absolutely. Always be updated how much you have in your checking account to prevent exceeding the amount. If unsure, it is better to call your bank.
For credit card accounts, you have the option to inform your credit card company to decline the transaction automatically if there is no available credit to cover the amount. This is to ensure that you avoid the hassle from having an overdraft amount.
Will the bank report this immediately to credit bureaus?
The bank will not report this to credit bureaus immediately. Just for additional information, financial institutions do not report to credit bureaus immediately. Banks or credit card companies report the account information to major credit bureaus once a month.
As mentioned above, that it is better to be updated on how much we owe before the statement cycle ends to ensure that balances are below the limit.
For checking accounts, we should be fully aware how much money we have in our checking account before making a transaction to avoid having an overdraft amount.
There are cases though due to emergency situations, we can’t avoid going beyond the limit. It is acceptable if it happened once or twice. But if it keeps happening, like late payments, we can’t make this as a valid excuse anymore. There is always a negative impact for every wrongdoing on our financial accounts; it can be a form of a penalty fee or a bad record on your credit report, or worst scenario, it can be both.