Loan Express does not require credit checks, decline a loan based off a credit check, nor do credit checks affect the minimum approved amount of the loan. The following article is purely for educational purposes.
Managing your finances can be tricky, and sometimes unexpected expenses or miscalculations can result in an overdraft on your bank account. While overdraft protection can provide a safety net, it’s important to understand the potential consequences of overdrawing your account.
One question that many Canadians have is whether overdraft affects their credit score. Your credit score is an essential factor that lenders consider when you apply for credit, so it’s natural to want to know how an overdraft might impact it.
In this blog post, we’ll explore the relationship between overdrafts and credit scores in Canada, so you can better understand how to manage your finances and protect your creditworthiness. Whether you’re a student, professional, or retiree, this information is relevant to anyone with a bank account.
What is an Overdraft?
Your debit card relies on your checking account having the proper funds to make a purchase. If your spending exceeds the funds in your bank account, you may accumulate an overdraft. When you don’t check your bank account often or before making a big purchase, it’s very easy to spend outside your current balance and go into a negative balance, triggering an overdraft fee.
How an Overdraft can Affect Your Credit
An overdraft can hurt your credit as soon as it is sent to collections. If you pay the fees associated with your overdraft and get your balance back on the positive side, you don’t have to worry about your credit being affected. But if you don’t pay back the money you owe for your overdraft fees by the time it is owed, your bank can send that debt to a collection agency, which will create an account for you and put this incident onto your credit report.
This delinquency will then remain on your credit report for seven years.
When creditors assess your credit score, they typically overlook the activity in your checking account, including overdrafts. Overdrafts themselves won’t necessarily lower your score, but their context can hurt you in the future, as overdrafts come with fees that can grow over time. Missing these payments will have an immediate negative impact on your credit score.
How to Avoid Overdrafts
One great trick to avoid overdrafts is to link your checking account to your savings account. Your bank will automatically cover a potential overdraft with money from your savings account, so you don’t overdraw from your checking account if you need more funds.
Always check your account balance, especially before making a purchase, and sign up to receive alerts from your bank to ensure your balance stays within a certain amount.
How to Fix a Credit Report Error
Sometimes, a major credit bureau can report false information from a clerical error, incorrect information from credit lenders, or fraud. If you notice a mistake on your credit report, you can follow these steps to fix it:
- You have the right to dispute any false claims with the 3 main bureaus, Transunion, Experian, and Equifax. Contact one of the credit reporting companies by drafting a letter and filing a dispute on their website.
- Regularly monitor your credit report so errors can be addressed quickly. All three credit bureaus are required to investigate the mistakes within 30 days.
- If your dispute is not accepted, you can still request documentation to be included in your file. This way, if someone inquires about your credit report, they can see an error was disputed.
Authorized vs. Unauthorized Overdrafts
Any overdraft that occurs when your account balance is negative and the type of overdraft impacts your credit score and fees is authorized. You are within bounds and authorized if your overdraft fee is under $200. An unauthorized overdraft goes beyond the $200 limit, and financial institutions are less accommodating when you have no overdraft protection. Avoid these overdraft fees by tracking your expenses and reviewing your spending habits.
Paying Off Your Overdraft
You can pay off your overdraft and avoid fees affecting your credit score in four ways.
- Use any money in your savings account to clear your overdraft. Paying off your debts faster leaves you with a better credit score overall.
- Choose a cheaper overdraft provider, as banks always try to win over new account customers. Go with a bank that offers free cash or an interest-free period up to a set limit on overdrafts. You should also ask your bank if switching accounts can save you money on overdraft charges.
- Think about getting a personal loan that helps you pay off your overdraft. Loan Express provides fast and easy payday loans that can help you pay off your overdraft fees quickly so you can escape debt as soon as possible.
- Move your overdraft to a credit card that offers a 0% money transfer. These cards pay money into your bank account, which can help you clear the overdraft, but you will have to pay off the debt to the credit card provider instead of your bank.
When it’s Time to Enable Overdraft Protection
If you have overdraft protection, you can cover your expenses even when you don’t have enough funds. Payments will be accepted, and you can make loan payments on time, no matter the amount of money in your account. Most banks automatically provide overdraft protection on your account, but it is best to discuss with your bank when it’s time for you to enable overdraft protection.
Ways to Improve Your Credit Score
There are many steps you can take to improve your credit score, including:
- Reviewing your credit reports and keeping track of spending.
- Budgeting and getting a handle on your bill payments.
- Using less than 30% of your available credit.
- Limiting your requests for new credit.
- Deal with any delinquencies in old accounts to make sure you have no negative financial statements on your record that you don’t know about.
- Consider consolidating your debt and tracking your progress with credit monitoring.
Lastly, consider Loan Express as the best loan option when you need to pay debts and fees off quickly, so you can worry less about overdrafts and more about saving for your future.