Banking History Can Affect Your Credit
Can a Negative Banking History Affect Your Credit?
Your credit history depends on many different factors — not the least of which is your banking history. While bounced checks and frequent overdrafts might not damage your credit report directly, it won't do your financial reputation much good. And that could lead to other credit problems, so you still need to know about how overdrafts, return checks and late payments can affect overall credit history.
What's the most common "negative banking activity"?
The information age has made it a lot easier for you to manage your money — especially with the advent of online banking. But "ease of use" is one thing; making sure you have enough in various accounts to cover all your costs is another. Here's a brief look at some common banking missteps.
Overdrafts and overdraft protection fees. Considering the vast number of different items you have in your regular budget — from mortgage payments to car loans to all your incidental expenses — overdrawing funds can be a common occurrence. That's why more and more people are getting checking accounts that offer built-in overdraft protection. And while overdrafts may not directly affect your credit, they can certainly influence your bottom line. A lot of banks offer overdraft protection, but the fees to cover negative balances can cost you an arm and a leg.1 As always, read the fine print. Banks need to make money too, and if they can get away with charging you high overdraft fees (standard fees just for having the protection — even if you don't overdraw), they will keep doing it.
Bounced checks. It used to be that bounced checks were mostly about embarrassment — when funds got tight and you wrote out a check that didn't clear. The check would be returned, and you probably received a call from the bank. Today, it's a little different; current technology makes those phone calls basically obsolete. Now, the bank's computer tracks all your financial activity and either pays the check — and hits you with a standard overdraft fee, usually between $20 and $402, regardless of the bounced check's actual amount — or returns it, unpaid, and waits until you have the funds in your account to pay it off. If you don't pay back the funds within a certain number of days, the issue can be turned over to a collection agency. And if that happens, your credit history will definitely be negatively affected.
Banking history. Your overall banking history can affect your credit report and credit history. And while there isn't an actual "credit report for bounced checks," per se, a Dallas, TX-based company called ChexSystems might be the next closest thing. Established in 1971, ChexSystems has become the last line of defense for U.S. banks and credit unions. If, for example, your bank can't collect funds — especially if they have provided overdraft protection to you in the past — they may contact ChexSystems about closing your account. Some common reasons why your banking history would be questioned might include:
- The bank's inability to collect for an overdraft, ATM transaction, or automatic payment that they honored on insufficient funds — regardless of the amount
- Many separate overdrafts
- Abusing debit cards, saving accounts and cash reserves
- Fraud — especially providing false personal information
Similar to credit difficulties such as bankruptcy, claims filed with ChexSystems can last up to five years from the date the incident was reported. Any issues you may have with ChexSystems are generally recognized as potential "bad news" for your financial future3, so do everything you can to avoid repeated patterns of overdrawing and bad check writing.