Q: I have overdraft protection on my checking account. Does this affect my credit score at all?
A: This is a bit of a tricky question. Generally speaking, overdraft protection itself – which is when a bank or other financial institution fronts the money for charges that aren’t covered by the funds available in a customer’s bank account – does not affect your credit score.
The reason: Most banks elect to either use their own money to cover the charges for a fee incurred each time a customer overdraws an account or allow customers to link their debit cards to other accounts they have, such as a savings account or credit card, to cover unwitting overdrafts.
Linking your overdraft coverage to your savings account isn’t going to have any bearing on your score, since this information – which doesn’t involve any credit lines – isn’t reported to the three major credit bureaus. Linking your overdraft coverage to a credit card could affect your score, though, if you were subsequently unable to pay off the charges, but that really doesn’t have anything to do with the overdraft protection itself. It simply shows up as an unpaid charge on your credit card bill.
OK, now here’s where it gets a little more confusing. Some banks market overdraft products that are linked to a line of credit. Citibank, which did away with offering overdraft protection when you use an ATM or at the point of sale, has a separate product called Checking Plus that customers can opt into if they don’t want to bounce a check.
Citi does report information on this product – which is considered a revolving line of credit – to the credit bureaus, a spokeswoman confirmed. As such, it could alternately help or hurt your credit score depending on whether you meet the repayment terms specified in your agreement with the bank.
“If the overdraft line of credit is reported on your file, typically as a line of credit, then how a consumer uses that [line of credit] could affect their score, just as their utilization of any other type of [line of credit] would,” says David Blumberg, a spokesman for TransUnion.
Of course, the lesson here is to ask your bank specifically whether the overdraft protection offered is linked to a line of credit. You will also want to ask whether information in these instances is in fact reported to the bureaus, because it isn’t always.
Wells Fargo, for instance, doesn’t report information on its direct-deposit advances, a product that is a bit different than overdraft protection but similar in that it involves a brief extension of credit.
Got a credit question? Email it to Skowronski.firstname.lastname@example.org or send a message to Jeanine on Twitter @JeanineSko and she will address it in a future Credit Q&A!