Man working on a laptop in a café with a coffee cup on the table.

How Does an Overdraft Affect Your Credit Score?

Published December 12, 2024

7 min read

Table of contents

Key Points:

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?

According to the Consumer Financial Protection Bureau (CFPB), an overdraft happens when a financial institution allows you to withdraw more money from your bank account than you have. 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.

What are overdraft fees?

It's important to note that using an overdraft isn't free. If you have insufficient funds in your account and the bank still pays your purchase, your financial institution may charge you 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 can also transfer funds from a linked account, like a line of credit or a credit card.

Find the best credit card for you

There’s no harm to your credit score to see if you’re pre-approved¹

Check Now

The main advantage of having an overdraft 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 use an overdraft responsibly and avoid relying on it as a long-term solution. While it can be helpful in the short term, consistently relying on an overdraft may 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 unless you’ve been sent to collections. But there are some cases where an overdraft may impact your credit report.

Multiple overdraft fee

Based on a report from Congress, a bank overdraft may still impact your credit rating. One of the main ways that an overdraft can affect your credit score is through overdraft fees. When you overdraw your account, most banks will charge you an overdraft fee for this service. Multiple overdraft fees can add up quickly and can 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. If the negative balance on your bank account means that your other creditors fail to get paid, you may receive late fees or have missed payments on those credit accounts. Your bank might report that debt to credit bureaus and can result in a derogatory mark on your credit report. Missed payments may impact your credit score, according to Michigan.gov. This mark on your credit file can 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—a kind of specialty consumer reporting agency for debit accounts (based on information from the Consumer Financial Protection Bureau). If your account closes and your bank reports you to this agency, you may have a hard time opening a checking account in the future.

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.

Did you know?

If you’re new to credit or need to rebuild your credit, the Discover it^® Secured Credit Card helps you rebuild your credit history.²

Learn More

How can I avoid an overdraft?

To avoid an overdraft and minimize its impact on your credit score and overall financial well-being, it's vital to be proactive and develop healthy financial habits. By taking a few simple steps and staying mindful of your spending, you can reduce the likelihood of overdrawing your account. Here are some practical tips that will help you avoid an overdraft and maintain a solid credit score:

Stay on top of your account balance: It's important to regularly monitor your account balance to have a clear understanding of how much money is available to you. By keeping track of your transactions, both incoming and outgoing, you'll have a realistic view of the funds at your disposal. This includes monitoring 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 convenient alert systems that can be customized to your preferences. Take advantage of these features by setting up alerts to notify you of low balances, pending transactions, or nearing due dates for bills. These notifications go directly to your phone or email, allowing you to stay informed about your account activity no matter where you are. With alerts, you'll have tools to manage your finances, make timely payments, and avoid unexpected overdrafts.

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: Establishing a realistic budget is a fundamental step towards financial stability. Evaluate your income and expenses, allocating funds for essential items such as rent, utilities, and groceries. Be mindful of discretionary spending, such as entertainment or dining out, and aim to keep it within a reasonable limit. Planning your expenses in advance will help you avoid overspending and minimize the risk of overdrawing your account.
Opt for overdraft protection: According to the Federal Deposit Insurance Corporation (FDIC), many financial institutions offer overdraft protection services, which can act as a safety net in case of emergencies or accidental oversights. Overdraft protection is optional; you must opt-in for the protection.

With these services you can choose to link your checking account to another account, such as a savings account or a line of credit. In the event of an overdraft, funds will automatically transfer from that account to cover the negative balance. While there may be associated fees, an overdraft protection service provides peace of mind, safeguarding you from potential credit score damage and excessive penalties.

By following these tips and making responsible financial choices, 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.

Important Information >