Does Overdraft Affect Credit Score?
Does overdraft affect credit score?
If you have a current account with your bank, chances are that you are probably not very familiar with the overdraft option. Maybe you know a little and don’t even think it’s a thing, but what’s that got to do with your credit score?
Some people might claim that there is no actual difference between an overdraft and a direct debit, which would be true if it weren’t for the fact that banks charge interest on overdrafts. This can end up costing much more than it does to process through direct debits. In this article, we will explain how the overdraft option works, why it affects your financial score, and if there is any way to avoid it.
What is an overdraft?
An overdraft is an account where you don’t have enough money in your account to cover all the transactions that take place in an instant. Normally, this means that you will have to pay fees for transactions that would normally be free. For instance, you have $50 in your account and want to pay bills worth $150. If you have overdrafts in place you can pay these bills even when your account balance is insufficient. You can borrow the extra money from the bank and your account will be -$100. You will therefore owe the bank $100.
Why do banks offer overdrafts?
There are many reasons why banks might offer this option. The main reason is the interest that you charge on overdrafts. Since the overdrafts amount are negative numbers, the bank will make a profit from your account for this transaction you placed into overdrafts.
If you only have a small transaction placed into overdraft and pay it back quickly, the bank won’t charge you fat fees. However, if you continue to do this regularly, banks will see this as a way of making money in the long run.
What are the different types of overdrafts?
There are 2 main types of overdrafts that banks offer.
The first type is a flat overdraft in which an amount is pre-approved before you receive the funds into your account. This is standard across most banks and you will find it at most banks. You apply for a certain amount in advance, you then get your paycheck and the payment is automatically placed into this account.
The second type, which is usually offered by smaller banks, is a flexible overdraft, also referred to as link overdrafts. This is a lot better as you can withdraw money anytime you need it. This is essential in times when there’s a mismatch between your account and your actual spending. It might be that you are simply spending more money than it should be. This is the main difference between overdrafts and direct debits. A flexible overdraft is usually linked to your bank account so that you can only withdraw the money you made in overdrafts. These kinds of overdrafts may be authorized by the bank even though you have not applied for it.
Does an overdraft appear on my credit report?
If you have an overdrawn account, the bank is almost guaranteed to report the information about this. If you have applied for overdrafts, the bank will probably report it as well. If you have not used your authorized loan amount, it will reflect as a zero balance. If you have used some or all your loan, the amount you owe the bank will show as debt on your financial standing report.
If you are using your overdraft and pay it in full every month then the dip in your overdraft will not be shown on your credit report.
So, do overdrafts affect credit score?
As the overdrawn account will appear in your credit report, if you continue to use this method of borrowing in your account then you will find it to be detrimental to your credit score. If your loan is planned, then it is unlikely that it will have a serious negative impact on your financial standing score, but only if you avoid exceeding your limits or failing to make payments. Keep in mind that when you use your loan sensibly and with full payments each month, you can improve your financial standing score.
An overdraft appears as a debt on your financial standing report, which will make you appear to be a possible risk for creditors. Conversely, if you consistently pay off your loan in full every month, then there will be no debt on your credit report. Over time, this lack of debt can help your score. Additionally, paying off your overdrafts on time will further improve it
Prospective lenders can see the loan on your financial standing report or score and view you as a risk when applying for loans or credit cards. This can cause you to pay more for loans, possibly preventing you from taking out the loan altogether. However, when they see that you pay off your overdraft when you are approved for the loan, you can be viewed as a more secure borrower. As a result, you will likely be approved for the loan at a lower interest rate.
If you are not planning on using your overdraft, then it is probably best to avoid carrying this type of account. If you can’t use it wisely, then you should consider removing the loan from your account.
As the overdraft will appear in your credit report, if you continue to use this method of borrowing in your account then you will find it to be detrimental to your credit count. Regularly exceeding your limits will damage your financial standing and in some cases, it can actually lower your count. Not only does the loan impact your financial standing count, but it also may prevent you from being approved for a loan or credit card.
How much overdraft will affect my credit rating?
Any loan or credit card that you take out will appear on your credit report. So, the size of the loan that you have will also be reported. The way to find out how much it will affect your score is to look at the FICO score. This score can range between 300 and 850. Your score is based on a variety of factors, including credit history and payment history.
According to the FICO scoring system, any account that is greater than your financial standing limit will have an impact on your score. The most important thing is how you manage your loan. Make sure you are paying off any debt that you have. If you are unable to pay off your loan and let it go past your financial standing limit, then it will affect your score negatively. You can actually use your overdrafts to show that you are a responsible borrower, but only if you can pay your debt off regularly.
Conclusion
A lot of people misuse their loans and end up hurting their credit score. Most of the time, those who do this have a constant dip in their loans. The worst thing you can do is consistently go over your credit limit. If you want to keep your financial standing score high, then control your loans and don’t keep dipping into them. If you have a loan, try to keep it under control. Don’t abuse your overdrafts, but also try not to let it go over your limit.