Will Being Overdrawn at the Bank Affect My Credit?

Between 2006 and 2008, over 50 million Americans had a negative checking account balance -- called being overdrawn -- according to the Center for Responsible Lending. In addition to penalties, overdrawing an account can damage your credit rating. Even if your credit rating stays intact, being overdrawn can hurt your chances at acquiring bank accounts in the future.

Identification

Overdrawing an account does not automatically damage your credit rating, because banks do not report banking history to the major credit reporting bureaus. However, if you ignore an account with non-sufficient funds, the bank can send the account to a collection agency, which will report the delinquency to the credit bureaus. The bank can also sue you, which will create a public judgment also picked up by the credit bureaus.

ChexSystems

Even if an overdraft does not go to collections, overdrawing on an account usually goes on your ChexSystems report -- a parallel reporting system for banking history. Most banks run a ChexSystems report before approving you for an account. A single overdraft can cause a bank to deny you service. As of 2011, negative items on a ChexSystems report stay for five years, according to Don Taylor of Bankrate.

Overdraft Protection

You might consider purchasing overdraft protection -- a small line of credit only used to cover a negative balance -- or the bank might offer this as a courtesy. Banks usually run a credit check before approving you for overdraft protection because it technically counts as a loan, so the bank incurs some risk. The inquiry for an overdraft line of credit does no more than five points of damage to your credit rating, but successive inquiries within the same year can do much more damage.

Tip

Reviewing your account before every transaction is the only way to guarantee that you do not overdraft. If you do overdraft, pay off the balance owed to the bank immediately, even if you have overdraft protection, as overdraft protection is still a loan that needs to be paid back. You can also link bank accounts at the same institution. If you overdraft because you do not earn enough money, look for ways to trim your budget, such as moving to a cheaper apartment.