Does Overdraft Protection Affect My Credit Score?

Having overdraft protection for your bank account may or may not affect your credit score. Banks offer more than one type of overdraft protection; one does not affect your credit score, but may impact your consumer ChexSystems report. ChexSystems is the primary reporting agency for your banking history. Negative information on your ChexSystems report may impede your ability to open a new bank account.

Overdraft Protection --- Savings

If your bank offers overdraft protection in the form of an automatic transfer from your savings account to your checking account as needed to cover insufficient funds, your credit score is not affected. If there is insufficient funds in your savings to cover the overdraft and if you never correct the situation, your bank account will likely be closed. You will also incur a negative entry on your ChexSystems report. ChexSystems reports are subject to the same credit reporting laws as your credit report. The Fair Credit Reporting Act allows consumers to dispute incorrect information at any time and to have negative entries removed after seven years.

Overdraft Protection --- Credit Cards

Linking your checking account to a credit card as a means of overdraft protection will affect your credit score. The impact could be positive if you continue to make your credit card payments on time. Depending on the balance charged to the credit card, your credit-to-debt ratio may be negatively affected. Banks may only approve overdraft transfers in specific increments, such as $100. The impact of this small amount of money will not be detrimental to your credit-to-debt ratio.

Overdraft Protection --- Line of Credit

Overdraft protection in the form of a line of credit will affect your credit score as a separate credit account. A typical credit line for overdraft protection is $1,000. Even if you never access the cash, the available credit can positively affect your credit score. If you do use the protection, make timely payments and your credit score will reflect a positive payment history.

Credit Score

Payment history and outstanding debt are two of the primary factors that credit reporting agencies use in credit score calculations. Combined, these two elements affect 65 percent of your overall credit score. An on-time payment history is a positive factor; late payments and delinquencies affect the score negatively. Outstanding debt reflects the credit-to-debt ratio. Overdraft protection tied to credit cards will affect the credit-to-debt ratio when you initiate the transfer from the card to the bank account. Overdraft protection tied to a loan or line of credit affects your credit score as soon as you initiate the loan.