Does Overdraft Protection Hurt Credit?

Overdraft protection is meant to cover the excess when you write a check for more than you have in your account, but overdraft protection can still damage your credit score. The effect of overdraft protection on your credit history depends on how you use it. A new overdraft account usually hurts your score, and you may not even need this service.

Identification

Most banks perform a hard credit check when you ask for overdraft protection. Hard credit checks take a few points off of your credit score. Also, banks often issue a credit card account as a line of credit as overdraft protection. This means that maxing out your overdraft limit can take even more points off of your credit score, because the FICO scoring system -- a risk model designed by the Fair Isaac Corporation and used by most lenders -- factors in the portion of your account limit you use.

Considerations

You must repay your overdraft protection account eventually. If you do not repay your overdraft line, the bank may send the account to a collection agency. Collection accounts do between 20 and 100 points of damage, according to David Ellis of CNN. Also, opening an overdraft account can affect the rest of your credit report. For instance, a new account lowers the average age of your existing accounts, which is worth 15 percent of your credit score.

Potential Damage

Even if overdraft protection does not affect your credit rating, it can still hurt your creditworthiness. Your current bank will look at your history when making future lending decisions. If you frequently go over your account balance, it may not offer new accounts or lines of credit.

Tip

In general, overdraft fees tend to be the most expensive way to cover negative account balances. Instead of overdraft protection, which costs about $40 per use, you can link checking and savings accounts together. Drawing money from linked accounts usually cost about $5 in 2011, according to the Federal Deposit Insurance Corporation. Ideally, you should review your account balance before each purchase either in lieu of overdraft protection or in conjunction with it.