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Does an Overdraft Impact Your Credit Score? More Than Just Fees

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Feb. 11 2022, Published 10:12 a.m. ET

Credit cards and loans are two of the biggest factors that can impact your credit score positively or negatively. Checking account and debit card transactions don't usually have a major impact on your credit score. However, in some cases, the fees associated with these transactions could damage your credit score. Overdraft fees are one of the most common fees that many banks issue, but does an overdraft affect your credit score?

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Having a healthy debt where you’re paying it off in a structured and timely manner can help your credit score, like making timely car loan payments. If you don't manage your debt and bank accounts correctly, credit bureaus like Equifax, Experian, and TransUnion might get involved.

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What is an overdraft?

An overdraft is when you spend more money than you actually have in your bank account. So, if a person’s checking account only has $50, and they make a purchase for $60, the bank will cover the purchase, but the person is responsible for paying back the $10 as well as an overdraft fee.

In most cases, banks don’t let you overdraft for free. The fees can vary depending on the type of bank. According to CNBC, the average overdraft fee in the U.S. in 2021 was $33.58.

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To avoid an overdraft and overdraft fees, you can opt out of overdraft coverage. When you opt out, making purchases that exceed your account balance will be declined. However, it’s best to be aware of the purchases you’re making and try to avoid overspending. There are fees associated with making purchases with insufficient funds even if the transaction gets declined.

NSF (nonsufficient fund) fees occur when your account is overdrawn and the transaction gets declined. Not all banks charge NSF fees. Some banks simply decline the transaction if you don't have enough funds, but make sure to check with your bank to see if it charges fees. Similar to overdraft fees, NSF fees vary from bank to bank. The national average ranges between $27 and $35, according to Investopedia.

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Does an overdraft affect your credit score?

Overdrafts won't affect your credit score, but not paying your overdraft fees can. Failing to pay overdraft fees on time or at all, as well as amassing multiple overdraft charges will impact your credit score. Usually, checking account activities don't affect a person’s credit score, but overdraft fees are different because they're a form of debt that you're paying back to the bank.

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As long as you pay the fee on time, your credit score shouldn’t be impacted. Even if you pay the fee on time, the bank might report you to the credit bureaus if you have repeated overdraft offenses. The bank might think that you don’t have proper control over your finances.

How bad will not paying overdraft fees impact your credit score?

It all depends on how many payments you’ve missed or been late on. In most cases, a few offenses won’t make your credit score drop significantly. If overdrafting and not paying the fees becomes a habit, it can lower your credit score over time.

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