Written for: GO Easy Financial
Do Overdrafts & Closed Accounts Affect Your Credit Score?
Your credit score can be influenced by plenty of factors. The number—a guide for lenders as to your creditworthiness—can fluctuate depending on many credit cards you have, what your debt is, and plenty more. Your score can go down if you owe a lot on your credit cards, or if you’ve defaulted on previous loans. It can all be a bit intimidating. In fact, it can get to the point where you may feel as if your entire financial existence is laid bare for all the world to see. The good news is that its not entirely true.
While lenders can be extremely particular and thorough when it comes to the credit history of their potential clients, there are two things that won’t affect it.
Overdraft will not affect your score.
Overdraft protection, a service provided by banks to reliable customers, allows you to spend more than what is in your account to help prevent your card being declined at the store, or cheques from bouncing at inconvenient moments. The bank approves a certain amount of overdraft, and then expects you to pay it back later. These overdrafts are not reported to credit bureaus—the money you use in bank accounts is your own, and not a loan from the bank.
That’s the good news! But the overdraft still needs to be paid. If you don’t pay them back in time, the overdraft is treated as an unpaid loan, at which point the bank is entitled to report it to a collection agency. This can negatively affect your score. Consider whether the fees associated with overdraft authorization, as well as the danger of defaulting on them, is worth it.
Closing bank accounts will not affect your score.
Many people may think that the number of bank accounts, like credit cards, can have an effect on your credit score. But because bank accounts are not loans, they don’t factor in at all. Your credit file only includes loans, credit cards, and records that involve debt, such as bankruptcies.
“Banks encourage you to open accounts,” explains Elena Jara, Director of Education at Credit Canada Debt Solutions. “They still charge you monthly fees for those accounts. So if you pay those, institutions won’t turn you away.” Regardless of the sum in your account or your spending habits, operating a bank account using your personal funds obligates you to pay nominal monthly charges, but not much else. And if you want to change banks for whatever reason, as long as you don’t owe those monthly fees to a bank or haven’t defaulted on your overdrafts, financial institutions will gladly have you as a client. So you can go right ahead and close those unwanted accounts!
But just because your credit score is not directly affected by opening and closing different accounts or going into overdraft on existing ones, it doesn’t mean that you can be as frivolous as you like.
Even if you’re not turned away as a client, banks may still do a credit check to determine what limits—if any—they should place on you, such as withdrawal limits at bank machines.
“Some banks may put restrictions on you if you’ve had issues with them in the past,” cautions Jara. “They may hold cheques longer than normal.”
The moral, though, is that a credit score is representative of only a fraction of your financial status and closing bank accounts and overdrafts won’t affect it.