Source: experian.com

Meta desc: What happens to your credit score if you overdraft? Find the answers and potential solutions here.

You may often only spend the funds in your checking account, which is restricted. For instance, if your account has $100, you are permitted to spend up to $100. Your bank balance would go negative if you attempted to spend $102 and the bank approved the transaction. Overdraft is the term used for this.

So overdraft and credit score are related to each other. When your bank pays transactions that total more than your balance, it will impose an overdraft fee. You can be charged a fee if your account is down for 5 or 7 consecutive business days.

Let’s look at some of the questions and answers regarding what happens to your credit score of yours if you overdraft.

Does having an overdraft impact applying for a mortgage?

Source: completemortgageinformation.com

The bank will carefully examine your finances when you submit a mortgage application. You will be required to present 3 months’ worth of bank statements, so it will be clear whether you frequently use your overdraft.

The qualifying requirements for mortgage lenders vary, but if your overdraft is near its maximum, you seldom pay it off, or you are in an unlawful overdraft, it may have an influence over your choice. All of these factors portray a person as having little influence over their finances, which is unattractive to a lender.

What is the Impact of Overdrafts on the credit score?

Information about your checking account is not frequently submitted to credit agencies. That’s because you’re using your own funds, not borrowed funds.

Fortunately, as long as you take prompt action to settle bank overdrafts, they won’t lower your credit score of yours. You can use your checking account normally once you’ve paid off the overdraft and returned it to at minimum a zero balance.

However, if you never pay the negative overdraft sum, a collection agency may be contacted to take further action on your unpaid debt. The debt collector will then add the account to your credit record after reporting it to the credit bureaus. The overdraft collection will impact your score. Even if you pay a collection account, it will be on your credit record for seven years until you negotiate its removal with the collection agency.

Does a credit report reflect an overdraft?

Source: fortunly.com

An overdraft can be listed surely as a debt on the credit report. If you don’t use your overdraft, the balance will show as zero. Viewing their credit report can allow anyone with an overdraft to estimate what’s the amount of money they owe.

If you use your overdraft just sometimes and pay it off when you are paid at the closing of a month, the credit bureaus won’t report it. This is due to the fact that so many building societies and banks only communicate with credit reference companies once each month. There is a possibility that it will overlook the brief usage of your overdraft because this is often how your bank account appears on that particular day.

Nonetheless, it will show up on your record of credit when you have worked with an unlawful overdraft or paid fees for not clearing your overdraft.

Does raising your overdraft have an impact on your score of credit?

Your bank will review your credit history when you apply to raise your overdraft to determine if you will be a trusted borrower or not. Many accomplish this by performing a soft search, often known as a soft credit check, which is invisible to lenders. Thoughtful searches may be conducted by some banks.

Although this will be recorded on the credit report, your credit rating won’t exactly be impacted. Only submitting several credit applications quickly will have an effect on the credit score. Then, it can appear to a lender that you have financial difficulties. Before taking any loan from lenders, do your research properly about them otherwise you will be in more danger.

Source: forbes.com

How can bank overdrafts be prevented?

Normally, you may connect your checking and savings accounts. In order to prevent you from overdrawing your checking account if there isn’t enough money there to cover it, the bank will then immediately pay any possible overdraft from the savings account. Of course, keeping accurate records may help a lot. Watch your account balance and sign up for notifications from your bank if it falls below a specific level.

A planned overdraft is most likely to have a major negative impact on the credit score as long as you keep within your overdraft limits and do not have any payments denied. Actually, if you utilize your overdraft wisely and consistently pay it off, it may boost your credit score. I hope you have got a clear understanding of what happens to your credit score if you overdraft by reading this article.