Irresponsible financial behavior -- such as missed payments to creditors or a defaulted debt -- hurts your credit score. The lower your credit score falls, the harder it is to obtain new credit. A simple miscalculation and the resulting overdraft fees can leave you owing a negative balance on your checking account. Fortunately, overdrawing your checking account once or twice doesn't hurt your credit score.
Checking Accounts
Although banks hold reporting contracts with the credit bureaus to report consumer loans and lines of credit, banks do not report the status of your checking account. Not only is the amount you hold in your checking account private, but checking accounts are a method by which you store your own money -- and thus not a reliable way for lenders to determine if you are likely to repay money they lend to you.
When your checking account reflects a negative balance, that means you spent more than your account contained. The bank covers this amount -- often charging you a fee for the service -- and expects you to repay the debt as soon as possible. Provided you pay off what you owe, you won't suffer a credit penalty.
Unpaid Overdrafts
When you deposit money into an overdrawn checking account, the bank automatically applies the money to the negative balance in your account. Provided you deposit more than you owe, the simple act of making a deposit brings your checking account current again. Leave your overdraft unpaid, however, and the bank will eventually give up on you paying off the negative balance and sell your debt to a collection agency.
Unlike a checking account, a collection account will appear on your credit report and factor into your overall credit score. A collection agency's report to the credit bureaus is always derogatory. Thus, an overdraft won't hurt you if you pay if off, but if you ignore the debt, it will damage your credit score.
ChexSystems
ChexSystems is a consumer reporting agency that keeps track of debts consumer owe in connection with irresponsible banking. If, for example, your bank closes your unpaid negative account and sells it to a collection agency, it will also report the debt directly to ChexSystems, where it will remain for five years. Banks routinely check ChexSystems before granting new checking accounts to consumers to weed out individuals who owe debts to other banks. Although ChexSystems is a consumer reporting agency by law, it does not assign consumers a credit score.
Preventing Negative Balances
According to the Federal Reserve Board, you have the option to request that your bank not cover your overdrafts. Should you attempt to spend more than you currently have in your checking account, the merchant will decline your debit card. While the situation may prove embarrassing, it protects you from a negative checking account balance and the steep overdraft fees certain banks charge for providing overdraft protection.
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