It is an all too common experience these days to login to your online bank account to check that day’s banking activities, only to face the unpleasant surprise that your account has experienced one or more overdrafts that day – resulting in $35, $70, $105 or more in accompanying overdraft fees in the process.
An overdraft, of course, is the situation whereby one or more transactions (e.g., checks written, debit card charges made) that you have initiated represents a dollar amount that exceeded the remaining balance in your checking account. Even for people who consider themselves to be very responsible with their personal banking practices and who run a pretty tight financial ship, overdrafts can be a regular occurrence.
Part of the reason for even the most responsible of us to have frequent overdrafts has to do with the way banks process transactions. For example, looking at the online bank statements in the case of most major banks, it is not always the case that the account owner can easily understand the account’s current status (in terms of outstanding transactions vs. current balance) by giving it just a quick glance. Rather, in many cases you have to get out your calculator and manually check for items that are not immediately obvious but that could affect your near term balance. Examples of such items include un cashed checks that already show as having been processed but that are not yet reflected in your current balance, or the often irregular timing by which the bank processes any outstanding transactions in a given day.
In short, it can require some serious manual calculations just for you to figure out where things stand with the balance for a given account. This takes time that many of us do not have, and we all pay the price in overdrawn accounts and heavy overdraft fee payments to our banks.
One thing that banking customers wonder is whether having a bank overdraft has an effect on a credit score.
The short answer is: no, the overdraft does not have an effect on your traditional credit, or FICO, score. The FICO score is calculated according to a certain formula that takes into account information pertaining to amount of outstanding debt, timeliness of payments, and related items. However, the determination of your FICO score does not reflect any elements of your overdraft history with banks.
That said, frequent overdrafts could end up getting your name reported to something called Chex Systems, which can result in your application for a checking account being rejected. Chex Systems is a financial reporting system that banks refer to when considering a new checking account application. You can get reported to Chex Systems if eFunds, the company that invented and maintains Chex Systems, believes that you have abused your bank account or bank related instruments in the past. This could potentially include overdrafts, especially if your bank covered your overdraft but you never paid them back for the amount they covered on your behalf.
If you are concerned about overdrafts and their effects, it is a good idea to consider opening a bank account that does not charge overdraft fees. These banks work by charging you a low monthly checking account fee and in return promise to never, ever charge you an overdraft fee. These banks are few and far between, but their ranks are growing and there are some reputable, national banks that offer no overdraft fee checking.
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