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How Does an Overdraft Affect Your Credit Score?

7 min read

Last Updated: April 23, 2025

Table of contents

Key Takeaways

An overdraft happens when you have insufficient funds for a transaction and your bank covers the cost.
An overdraft fee may impact your credit score if your bank reports the unpaid account to the credit bureaus.
You should monitor your account to make sure that you have enough funds for every transaction.

You’re out shopping and spot a must-have item, and as luck would have it, it’s on sale. You swipe your debit card even though you’re not sure of your exact balance. Except you find out you only have $100 in your account, but your purchase is worth $150. What now?

If your bank approves the transaction, you’ll have a negative bank balance. This is an overdraft. Think of it as borrowing money from your bank in the form of a short-term loan. With an overdraft, your bank will cover that extra $50 for you, allowing the transaction to go through.

In short, an overdraft means that you’ve spent more money than the available balance in your bank account. When you exceed your credit card limit, it’s called an over-limit transaction or going over-the-limit.

What are overdraft fees?

It's important to note that using an overdraft isn't free. If you overdraft your account, resulting in a negative balance, your financial institution may charge you a fee. This is called an overdraft fee. This fee can vary depending on the bank and the terms of your account.

Additionally, some banks may also charge interest on the amount you borrow through an overdraft (like how a loan works). If you overdraft your bank account, you might be able to transfer funds from a linked account, like a line of credit or a credit card.

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The main advantage of having overdraft protection is that it provides you with a safety net when you need it. Life can be unpredictable, and there may be times when unexpected expenses or emergencies arise, leaving you short on cash. An overdraft can help you bridge the gap until you’re able to deposit more money into your account.

However, it's important to avoid relying on it as a long-term solution. While it can be helpful in the short term, consistently relying on an overdraft might rack up fees, indicate ongoing financial struggles, and can lead to a cycle of debt. It's always a good idea to monitor your account balance and strive to maintain sufficient funds in your account.

Will a bank overdraft affect my credit score?

Your credit score usually doesn’t factor in banking activity unless you’ve been sent to collections. But there are some cases where an overdraft may impact your credit report.

Multiple overdraft fees

When you overdraw your account, most banks will charge an overdraft fee for this service. Multiple overdraft fees could add up quickly and become a financial burden. If you're unable to pay these fees, your financial institution may report it to the credit bureau, which may show up on your credit report.

Missed payments

Another way that a bank overdraft can affect your credit score is if it remains unpaid for an extended period. Your bank might report that debt to credit bureaus and this could result in a derogatory mark on your credit report. This mark on your credit file could make it challenging for you to qualify for loans, credit cards, or even rent an apartment in the future.

Even though not all banks report overdrafts to credit bureaus, you may still be reported to checking account reporting companies. These companies are specialty consumer reporting agencies for debit accounts (based on information from the Consumer Financial Protection Bureau). If your bank reports your account, you may have a hard time opening a checking account in the future.

Additionally, paying back your overdraft and fees might mean that you’ll miss payments to your other creditors. Your credit card company could report late credit or missed card payments to the credit bureaus, which may result in a lower credit score.

In short, overdraft fees and unpaid overdraft balances can both negatively impact your credit. To maintain a healthy credit score, it's best to try to avoid overdrafts and make sure to repay any negative balances promptly.

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How can I avoid an overdraft?

A good place to start is to develop healthy financial habits. When you stay mindful of your spending, you can reduce the likelihood of overdrawing your account.

Stay on top of your account balance: You can get a clear understanding of how much money is available to you check in on your account balance. Keep track of your transactions, both incoming and outgoing, and you'll get a realistic view of the funds at your disposal.

Mobile banking can help you check your activity anytime. Checking your mobile app will let you see direct deposits, debit card payments, scheduled bill payments, and any other financial activities that affect your account balance. Understanding your cash flow will help you make informed decisions, ensure you always have sufficient funds, and help you avoid dipping into negative balances.

Set up alerts and notifications: Most banks offer alert systems that you can set to what works best for you. Alerts can notify you of low balances, pending transactions, or nearing due dates for bills you have on autopay. Notifications can go to your phone or email, allowing you to stay informed about your account activity no matter where you are.

Cardmembers can set up alerts that help you stay on top of activities such as payments, spending, and fraud. Text APP to 20877 to download the Discover Mobile app on your phone.

Create and stick to a budget: A realistic budget is an important part of being financially stable. Look at your income and expenses, allocating funds for essential items such as rent, utilities, and groceries. Be mindful of what you spend outside of your bills, such as entertainment or dining out, and budget for that too. Planning your expenses in advance may help you avoid overspending and lower the risk of overdrawing your account.

Use overdraft protection: Many banks offer overdraft protection services. Note that overdraft services are optional and you must opt-in for protection. There also may be fees for using the service. You’ll link your checking account to another account, such as a savings account or a line of credit. If you have an overdraft, money will automatically transfer from that account to cover the negative balance.

The bottom line

You can take control of your financial well-being and minimize the likelihood of overdrawing your account. It's important to remember that overdrafts not only incur costly fees but may also impact your credit score if left unresolved. By proactively managing your finances, staying informed about your account balance, and utilizing the available tools and resources, you can avoid overdrafts and maintain a healthy credit score.

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