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Bank overdrafts may happen if you don’t have enough money in your bank account to cover a transaction, whether money is tight, or you simply mismanaged your funds. With overdraft protection, you may be covered for these overdrafts and can avoid pesky NSF fees. But does overdraft protection affect your credit score?  

Key Points:

  • Overdraft protection can cover you if your bank account doesn’t have sufficient funds to cover a transaction.
  • Overdraft protection may also help you avoid being charged NSF fees every time your account goes into overdraft.
  • Overdrafts are in your account and not in a borrowed account, so they don’t necessarily affect your credit score.
  • However, if your account is often in the negative or you fail to pay your overdraft protection fees, this debt may be sent to collections, which may negatively affect your credit score.

What Is Overdraft Protection?

An overdraft occurs when there aren’t sufficient funds in your bank account when you make a transaction or withdrawal. Despite the lack of funds, your bank may still allow the transaction to go through. This will result in a negative account balance. However, an overdraft may trigger Non-Sufficient Funds (NSF) fees.  

With overdraft protection, however, you may be able to avoid these NSF fees, up to a certain overdraft limit. The amount of overdraft protection you have is based on several factors, such as your banking history and personal needs. 

Bank overdrafts are basically small temporary loans that you must pay back within a specific amount of time, which varies by bank. Interest is usually charged on the amount overdrawn. 

How Does Overdraft Protection Work?

Overdraft protection is essentially a guarantee that your transaction (up to a certain dollar amount) will go through if your account has insufficient funds. 

For instance, let’s say you have $100 in your bank account, and you make a transaction of $150. That would mean you’d be overdrawn by $50 and your account balance would show a negative balance of $50. 

This amount would have to be paid back along with interest and fees. To repay it, you simply need to add money to your account. If you deposit $250, for example, your account balance will display $200 ($250 – $50), minus the fees and interest. 

Overdraft Protection Fees

If you opt to use the overdraft protection services your bank offers, there will be applicable fees. The fee may be charged monthly or per transaction. Fees typically range between $2.50 to $5. If you’re unsure of what the fees are, inquire at your bank about overdraft protection pricing.

For the big banks in Canada, refer to the following chart for overdraft protection fees:

BankOverdraft Protection Fee (Per Month)
TD$5
RBC$5
CIBC$5
BMO$5
Scotiabank$5

What Are Non-Sufficient Funds (NSF)?

As mentioned, an NSF fee may be charged if you don’t have enough money in your account to cover a transaction. 

NSF fees are charged when there is not enough money to cover a transaction. Currently, these fees range from $45 to $50, depending on the financial institution.

When Can You Incur NSF Fees? 

Common scenarios when NSF fees may be triggered include the following:

  • You have pre-authorized bills and forget to ensure that there’s enough money in the account to cover the charges
  • You write a cheque and your account has insufficient funds when the recipient attempts to cash the cheque

Does An Overdraft Affect My Credit Score?

The short answer is no, an overdraft will not affect your credit score. Your banking information is not regularly sent to the credit bureaus because it’s your money, not borrowed money. So long as you bring your balance back to $0 or greater and pay the overdraft bank fees in a timely manner, your credit score won’t be impacted.

Can An Overdraft Affect My Credit Score If I Don’t Pay It Back?

If you don’t bring your bank account balance back to at least $0, your bank has the right to close your account and send the amount owing to a collection agency. If this happens, it could negatively impact your credit score, as it would appear on your credit report and stay there for up to 7 years, even if you repay it.

Does Overdraft Protection Affect My Credit Score?

Overdraft protection may not affect your credit score, as long as you keep up with the monthly fees. However, if you don’t pay your overdraft protection fees, your credit score could be negatively affected. 

Like a long-standing negative account balance, unpaid overdraft protection fees could be problematic for your credit score. If you don’t have this unpaid debt, it may be reported to the credit bureaus, which can damage your credit score.

Overdraft Protection And Your Credit Cards And Lines Of Credit

If you have overdraft protection that is linked to a credit card or line of credit, your bank may use these accounts to cover your transactions when your bank account has insufficient funds. 

  • Line Of Credit – With a line of credit, you’ll owe interest on the amount you’ve overdrawn. If you fail to make your minimum payments on your line of credit, it could impact your credit score. Moreover, by adding your overdrawn balance to your line of credit, you’ll be increasing your debt-to-credit ratio, which may also affect your credit scores.
  • Credit Card – With a credit card, your bank may cover your overdrawn amount with a credit card cash advance. This means the cash advance interest rates could apply on the amount overdrawn using your credit card. Similar to a line of credit, your credit score may be affected if you fail to pay back your cash advance.

Will A Bounced Cheque Affect My Credit score?

Yes, a bounced cheque could potentially affect your credit scores. For example,iIf you issue a cheque to pay your credit card and it bounces, you may be charged an NSF fee. If you don’t pay the NSF fee within 30 days, your account may be considered delinquent and reported to the credit bureaus. 

You also still owe the balance of your credit card, which could be sent into collections too. Delinquent accounts can have a negative impact on your credit score.

Bottom Line

Overdraft protection may come in handy for the odd time that your account doesn’t have sufficient funds to cover a transaction. But it shouldn’t be relied on. A habit of repeated overdrafts may be a sign that you need to get a better handle on your finances. In the meantime, overdraft protection shouldn’t affect your credit score, as long as you pay your fees on time and bring your bank account balance back into positive territory.  

Overdraft Protection FAQs

How do I avoid NSF fees?

To avoid NSF fees, make sure to monitor your bank balances or sign up for overdraft protection. If you’ve already incurred NSF fees due to an overdraft, communicate with your creditors. Depending on your situation and track record, they may agree to waive these fees and give you additional time to pay.

How do I avoid using overdraft protection?

Again, you’ll want to keep track of your account balance to make sure there’s enough in there to cover all upcoming bills each month. Don’t forget about automatic payments, as these can sometimes be a common cause of overdrafts. Also, keep a financial cushion in your account just to be on the safe side.

What is overdraft protection for?

Every now and then, finances may be tight. Bank overdraft protection services are designed to help people cover their expenses in special circumstances. But if you’re using overdraft protection services all the time, you’re likely spending more than you can afford on a regular basis. In this case, you may want to seek professional financial advice.

What happens if I go into overdraft too often?

If your account frequently goes into overdraft, your bank reserves the right to close your account and even send you to collections. If you’re finding yourself going into overdraft a lot, you’ll need to revisit your budget, income, and bills and make changes where required.

Veronica Ott avatar on Loans Canada
Veronica Ott

Veronica is a writer who specializes in creating unique and educational personal finance content. She has extensive experience writing blog posts for companies in the financial sector. Veronica's background is in accounting as she graduated from Western University in 2017 with a degree in accounting. She is passionate about using her accounting expertise to help others with their personal finance questions and issues and enjoys using her writing to educate Canadian readers. When Veronica is not writing, she enjoys film, reading, travelling, going to the gym, and listening to music.

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