Bank Overdraft's Effect on Your Credit Score
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The Big Question: Do Bank Overdrafts Affect Your Credit Score?
Your credit score - also called your FICO score - is one of the most important "facts" about you that affects your financial life.
A low credit score can mean getting constantly rejected for new loan applications and paying much higher-than-average interest rates on credit cards, mortgages, and auto loans. Basically, it cramps your financial style.
Another common concern that many checking account holders today have has to do with the occasional - or even monthly or weekly - overdrafts that many they are experiencing with their bank accounts. Overdrafts are on the rise, especially over the past 5-10 years, as big banks find more ways to squeeze the average consumer out of their hard-earned money through service fees such as overdraft fees.
Given the importance of one's credit score and the high incidence rates of overdrafts these days, a natural question arises: "Can checking account overdrafts adversely affect my credit score?"
A low credit score can mean getting constantly rejected for new loan applications and paying much higher-than-average interest rates on credit cards, mortgages, and auto loans. Basically, it cramps your financial style.
Another common concern that many checking account holders today have has to do with the occasional - or even monthly or weekly - overdrafts that many they are experiencing with their bank accounts. Overdrafts are on the rise, especially over the past 5-10 years, as big banks find more ways to squeeze the average consumer out of their hard-earned money through service fees such as overdraft fees.
Given the importance of one's credit score and the high incidence rates of overdrafts these days, a natural question arises: "Can checking account overdrafts adversely affect my credit score?"
5 Factors that Affect Your Credit Score
How your FICO score is calculated.
To improve your credit score, it is first important to gain a deeper understanding of how your score is calculated. Here are the 5 factors that, together, represent how your FICO score is calculated.
- Payment history - 35% of your score: have you been making debt payments on time? More on-time payments means a higher score.
- Amounts owed - 30%: how much do you owe relative to your total credit line? The less you owe relative to how much you could borrow (given total credit line), the better your score.
- Length of credit history - 15%: the longer you have been in the credit game (borrowing money) - and the longer each of your current accounts have been open - the better.
- New credit - 10%: having been approved for a lot of new credit cards in a short period of time can have a downward effect on your score.
- Types of credit used - 10%: making regular, on-time payments to multiple lenders can have a positive effect on your FICO score.
What About Checking Account Overdrafts?
How do they affect my FICO score?
BUT WAIT - bank overdrafts CAN have a negative effect on another type of risk-assessment instrument that does affect your financial life: whether you get reported to something called Chex Systems. If you have been reported to Chex Systems, you may be facing some financial bumps down the road.
How Being Reported to Chex Systems Can Hurt You
1. If you have a checking account and then take some action that causes a violation, your bank may report you to Chex Systems.
2. Violations include, but are not limited to: a. having committed bank fraud; b. executing too many overdrafts; c. having had your bank cover your overdrafts but your failing to pay the bank back
3. When you apply for a new checking account at another bank, the bank will likely check Chex Systems to see whether your name appears. If your name appears there, your new prospective bank may reject your checking account application.
Alternative Checking Accounts, Better Credit Score
Sick and tired of paying overdraft fees? Or, just want to improve your FICO (credit) score? These resources can help.
- Escape Overdraft Fees
- Leads you to a list of banks that do not charge overdraft fees.
- Which Banks Do Not Use Chex Systems?
- If you have been rejected for a new checking account, it is likely that you are listed on Chex Systems. This is the FICO score of the banking world. Luckily, some banks - also called Second Chance Checking banks - do not use Chex Systems. Here is a resource for finding these banks.
- 37 Day Credit Plan
- If you need help raising your FICO score, check out this awesome resource.
More Helpful Overdraft Charge / NSF Fee Information
by OutdoorExplorer
OutdoorExplorer
Everett is a big believer in bringing to light many of the most pressing consumer issues of today, especially in the area of personal finance. When no... more »
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