Does an overdraft affect your credit score?
If you have ever thought, does overdraft affect credit scores? The truth is that it’s complicated. This is because if you manage your overdraft correctly, your overdraft facility is not included in your credit report.
This is why it’s so important to learn more about overdraft facilities. It is part of your overall credit profile and can affect your credit score.
Want to learn more about how an overdraft facility can impact your credit score? You’re in the right place. Read on for everything you need to know.
What Is an Overdraft?
An overdraft facility is linked to your checking account. It simply the ability to go into the negatives when you’re out of funds. This is essentially an instant loan granted when your balance goes into the negatives. This allows you to make purchases without interruption.
An overdraft facility allows you to still use your checking account even when it’s in the negatives. This makes it easier for you to keep track of your expenses. You can still use the same card for all your transactions. In this way, you don’t have to switch to another card or credit card just to get access to credit.
Overdraft facilities are credit products but only kick in when your account is in the negatives. Some banks do charge an overdraft fee every month. Other banks choose to only charge you if you go into the negatives that month. This can help you save money on fees as you only pay for the service if you actually use it.
Do Checking Accounts Appear in Credit Reports?
An overdraft facility is technically a credit product, but it’s linked to your checking account. This means that your credit report won’t always highlight or even include it. However, there are a few special circumstances where your checking account becomes included in a credit report.
If you were to miss payments or mismanage your overdraft facility, your bank will flag this in the same way as if you were missing payments on your credit card. In this way, your checking account would appear in your credit report to highlight that you have been missing payments.
Does Overdraft Affect Credit Scores?
As mentioned above, your overdraft facility, while linked to your checking account and is not included in your credit report. However, if you were to mismanage your overdraft facility, this would appear on your credit report and negatively impact your credit score. This is why it’s so important to keep an eye on your balance and make sure that you make your payments on time.
How an Overdraft May Affect Your Credit Score
When it comes to your credit score, your overdraft facility can have a negative impact. Here’s a quick look at the different ways an overdraft can impact your credit score.
Payment History
While an overdraft facility won’t show up in your credit report, it will appear if you miss payments. In most cases, the bank will let you know that you have to pay back a certain percentage of the credit by a set date. This is incredibly important to remember as missed payments will reflect negatively on your credit report.
Your payment history is an important part of your credit report and is often what reassures financial institutions that you are trustworthy to pay your bills on time. In this way, missing your overdraft payments can have a negative impact on your credit score.
Credit Utilization
Credit utilization is an important metric that shows you how much credit you use compared to how much credit you have access to. In simple terms, if you have a credit limit of $10,000 but only use $1,000 of it this month, your credit utilization rate would be 10%.
Maintaining a low credit utilization rate is a great indicator that you know how to manage your finances well. This is because needing credit is a sign that you don’t have enough to cover all of your expenses that month. In this way, a low utilization rate means that you can handle your finances and don’t need to use all of your credit.
How To Manage Your Overdraft Facilities
Managing your overdraft facilities is the best way to ensure that your credit score continues to grow. Here’s a quick look at a few helpful tips to manage your overdraft facility.
1. Never Take Credit You Don’t Need
As mentioned above, applying for credit should calculated. This is because if you apply for tons of different credit facilities, it indicates that your financial health may not be the best. There are soft inquiries and hard inquiries, with hard inquiries having an impact on your credit report and credit score.
Soft inquiries are not weighted as heavily. You could be looking around for possible credit opportunities. However, hard inquiries are applications that indicate you need credit. These inquiries when kept to a minimum are a sign of your good financial health.
2. Budget Your Finances
Most people around the world have some kind of debt that they are slowly paying off. If you have missed payments or are struggling to consolidate your debt, it’s important to talk to a credit coach or a financial planner to understand your situation better. Once you have a good idea of all your bills, it’s important to start paying them down.
The best place to start is with a budget. You can seek help from a financial planner. This budget should take every expense you have into account so that it can help guide you in a practical, realistic way.
Once you have this budget set, it’s important to stick to it. Consistency in this way is essential to help you pay down your bills and decrease your debts. In this way, you can slowly reduce your debt and boost your credit score at the same time.
3. Always Pay on Time
In simple terms, a credit score is a simple metric to help financial institutions understand how trustworthy you are with credit. This is true for all types of credit from a home loan to a credit card. One of the most important metrics that these institutions look at is your credit history as they want to see if you normally pay your bills on time.
Your payment history is usually added to your credit report. This is why it’s so important to make sure that you always pay your bills on time, never missing a single payment. If you are bad at remembering to pay bills, consider creating debit orders so that they get paid automatically.
If you have a bad credit score, this simple tip can help you improve your payment history over time. In this way, your report will show how you have never missed a payment in such a long time, improving your chances of securing credit in the future.
The Benefits of Learning About Credit
As mentioned above, managing your finances is one of the most important skills to have. This is because financial literacy can help you budget your money ahead of time so that you never miss a payment. This way, you can improve your credit record.
Learning about managing your money includes learning about credit. This is an important part of financial literacy as credit is an important concept to understand. In most cases, you will need to have a good credit record and access to credit facilities to buy a car or a house.
This is why maintaining a good credit score is essential. Even if you think that you’re too young, the truth is that the earlier you start, the better. With just the tips mentioned above, you can improve your financial health and set yourself up for success in the future.
Improve Your Credit Today
If you’ve ever wondered, does an overdraft affect credit scores? You don’t need to worry if you manage your credit facilities perfectly. This is because an overdraft facility won’t even show up on your credit report unless you miss payments and collect overdraft fees.
This is why financial planning is such an important skill to learn as it can give you the tools you need to manage your money better. If you’re interested in furthering your skills, contact us today to learn more about working with an expert credit coach.
