Have you ever overdrafted and wondered if it would hurt your credit score? What is the difference between overdraft protection and overdraft coverage? Get the answers to these overdraft questions.
What an Overdraft Means for your Credit Score
Have you ever been to the grocery store the day before payday without enough money to cover your purchase? You have a choice: tell the cashier to put all of your items back or you can overdraft your account, which may come with a fee. Overdrafts can happen, we all know that. But, they can be expensive. Read on to learn more about how you can prevent overdrafts from happening and how they can affect your credit score.
What’s an Overdraft Fee?
An overdraft fee is the amount you’re charged when your bank covers a purchase or ATM withdrawal when you don’t have enough money in your account, resulting in a negative account balance for you. If that’s not enough, you’ll also have to pay back the amount of the overdraft and any overdraft fees so that your account has a positive balance. Some banks will even charge an additional fee if you don’t bring your account balance positive fast enough.
Federal regulations have been put into place to protect consumers from banks that charge multiple overdraft fees during a day, but there are still additional costly fees that can happen because of overdrafts. Luckily, there are steps you can take that can help even when you do overdraft your account. Find yourself overdrafting often? Think of these questions:
- Do you have a budget in place? You should always know how much money you have coming in and out to limit any surprises.
- Do you review your account often? Figure out how often you need to review your account. For you, that may be weekly or daily.
- Do you have any automatic payments set up? It’s easy to set payments up, then forget them. Some overdraft services cover automatic payments made through your bank, while others don’t. Include any automatic payments in your budget, so you always know what’s coming out and when.
Hey, Checking Account Meet My Credit Report
Is your checking account reported to the credit bureaus when you overdraft? The short answer is no, overdrafts are not directly posted to your credit report. The money in your banking account is your money. However, if your account has a negative balance and you don’t pay it back it could be sent to collections3. This is bad news for your credit score. An easy way to bypass these delinquencies landing on your credit report is to pay up. That means bringing your account balance to a positive balance as soon as possible.
Overdraft Coverage vs Overdraft Protection: The Difference
Traditional banks give you the option between overdraft protection and overdraft coverage. Who knew there was a difference? There is, and not knowing which may work best for you can be costly. You usually decide which you prefer when you open a checking account.
Overdraft coverage allows you to choose to have your debit card approved or declined when you don’t have enough money to pay for a one-time purchase or transaction. If you opt-in, then your card may be approved even if you don’t have the funds available. The problem is that you risk having an overdraft fee charged. This coverage may apply when you write a check, make an automatic bill payment, or use your debit card for an ATM withdrawal or to pay for a transaction. If you opt-out, your bank will not pay any transactions if you do not have enough money to pay.
Overdraft protection allows you to select another account where the money will come from if you overdraft. This other account can be a separate checking, savings, or credit card. You should consider that with a credit card, you’ll incur interest on any overdraft the same as you would any other credit card purchase.
Put the Brakes on Overdrafting Your Account
The best thing to do is make sure you always have enough money in your account. But, hey, that’s not the case all of the time. Take a look and see if your bank offers instant balance alerts. These help you stay on track of your spending. If your bank doesn’t offer them, check out Porte.
Another option is to use Overdraft Choice.3 This is a tool within Porte’s optional Overdraft Service which gives you more control. Toggle Overdraft Choice on when you need to make an overdraft. Don’t need it? Turn it off. It’s that easy.
Want to make overdraft fees disappear? Simply pay back that overdraft within 24 hours and Porte’s overdraft fees will vanish.
We know that sometimes you can’t avoid overdrafts, but with these steps you can limit them and be on your way to a better financial future.