The availability and easy access of financial transactions via bank accounts have welcomed updated and novel strategies for account holders bringing diversity and functionality to the financial platforms. However, with a budding trend and upsurge in the number of bank accounts, the account holders are recommended to adhere to the specialists’ structural ideologies and strategies. With each category of banking accounts, there are protocols and constraints about the procedure, limits, financial transactions, and funds availability that a few account holders generally disregard. One of the usual slip-ups occurs if an individual expends more than the financial threshold for accessible monetary resources. This common inaccuracy is recognized as a bank account overdraft.
What is a bank overdraft, for example?
The bank overdraft represents current liability when you can borrow money through your existing checking or saving account by taking out more money than you have in the account. For example, you have in your account $100, and you withdraw $120. The bank allows you to borrow a set amount of money.
The idea of overdraft is mainly affiliated with a checking account in which the individual consumes more than the available assets from the lending establishment, making the account touch zero. This materializes when the total limit is withheld from the accounts generating inadequate cash, leaving zero money. A situation like this arises if additional or more than the limit money is withdrawn instead of the current funds stored in the account. If the mentioned agreement is implemented between the individual and the financial institution, then interest is applicable on the overdraft limit at an approved rate. However, the overdraft should be within the threshold for a nominal interest rate and not surpass the decided terms. A higher interest fee is charged from the individuals making them pay the upper-interest rate.
For the sake of understanding, let’s say an individual has $590 in the account. $590 is the maximum amount of funds allowed for withdrawal by the account holder; however, withdrawal above $590 would apply a serious interest rate if it exceeds the threshold set by the Institute. If, say, $660 has been deducted, then the account would go into a negative balance and be termed an “overdraft account.” The bank’s responsibility changes as an overdraft fee would be required to pay, which would compensate the transaction cost conducted by the bank. The policy may Vary; if the account dwells in a negative balance for more than a week, account holders would be subjected to a substantial fee.
Overdraft fees and financial penalties set by the bank may increase financial consequences leading to interest rates. In addition to that, the overdraft fee can also affect your credit score.
Does Overdraft Affect Credit Score?
No, bank overdraft does not affect your credit score, and overdraft information itself does not appear on any credit report. However, if you overdraft your bank account too much and avoid paying debts, the bank, as your creditor, can report you to the credit bureaus and then damage your credit score.
In most of the scenarios, overdraft is generally overlooked and unattended by most of the credit bureaus. The financial institutions are least bothered about it because it is their money that has not been borrowed or loaned By the individual, but instead, it is the personal funds that have been pulled out. Generally speaking, the bank overdraft does not affect the credit score as long as they are managed and handled sophisticatedly. Once the overdraft extension fees have been paid off appropriately, the checking account will go back to zero balance, and you can continue using your account like before. However, if the overdraft fees have not been taken care of formally and officially, the bank authorities cannot figure out the reason behind overlooking overdraft fees. Therefore, the situation would be directly sent to the collection agency for further evaluation. At this point, the personal account is evaluated, and the debt collector may notify your account to the credit bureaus, therefore, upsetting your credit score. This situation can become a serious concern for the account holders as the collection account will hang on the credit report For at least seven years, which can only be cleared by taking the matter with the collection agency to eradicate the status of the overdraft fee.
If the overdraft fee directly affects your financial status, you need to resolve it appropriately within working days. It presently does not influence a credit score; however, it can indirectly influence financial support and reputation if the bank does not compensate the payable amount. Furthermore, funds available within the checking account are not included in credit reports because that money is not borrowed. Therefore the probability of incurring an overdraft fee on the credit report is quite negligible and easily resolvable. A banking reporting bureau labeled ChexSystems Will keep an eye on the deposit account along with banks and credit unions. This platform is well known for keeping track of your credit activity and minimal instances such as overdrafts, bounced checks, and attended negative balances. In addition, involuntary account closure and any fraud-related element on the credit or debit cards and the ATMs are analyzed.
If an unattended overdraft fee is not adequately supervised, then you could experience problems when opening a new bank account as you would come under the radar of Chexsystems. That is vigilantly keeping an eye on overdraft Fee occurrences, Making you an irresponsible account holder. Nevertheless, there is no need to worry as you can clear your historical track with the platform or try opening up a new bank account that offers a second chance account to the individuals without the tracking system of ChexSystem. If you are one of those individuals who tend to indulge in frequent overdrafts, it is better to choose the overdraft protection option. The banks offer a choice of decline transactions if the card or the checking account is being used more than the financial limit. This option protects you from spending excessive funds by preventing drawing more funds from the link account.
Can you go to jail for over-drafting your bank account?
No, you can not go to jail for over-drafting your bank account. If you overdraft your bank account too much and avoid paying debts, the bank, as your creditor, can report you to the credit bureaus, close your bank account and then damage your credit score.
However, by the law, states can determine jail punishment for overdrawing your account, but the “reasons for overdrawing an account must support a criminal prosecution”.
It is always advisable to pay the overdraft fee back to the financial institution before sending it to the collections. You need to avoid sending the debt to collections As. Once the agency has created an account for you, you can go to the credit report. If the matter has reached the instance of the credit report, then any financial hurdle will be there as delinquency for seven years. Therefore, the overdrawn balance should be paid as soon as possible to protect yourself from reaching the collection.
Additionally, other factors need to be considered to have good financial hands. Be mindful about the payment history S missed our late payments can negatively influence your credit score. Moreover, Be careful about maximum credit utilization and try To utilize more than 30% off the current credit balance.
Lastly, diversify account types that include credit cards and loans exhibit financial history with a different variety of dates and can boost your credit score.