Overdrafts Don't Impact Your Credit Score Directly, But Here Is How They Could Impact You

By Julien Brault, founder of MooseMoney.

An overdraft on your chequing account will not directly affect your credit score. "A chequing account is not a credit account, so it isn't typically reported to the credit bureaus on a regular basis. It might get reported if you go into overdraft and don't repay the overdraft according to the terms. But in terms of just having overdraft, that isn't usually data that is sent to the credit bureau," explained Julie Kuzmic, Head of Consumer Advocacy and Compliance at Equifax Canada.

Matt Fabian, Director of Financial Services Research at TransUnion, confirmed the same principle from the other bureau's perspective. "Overdrafts don't have an immediate impact on your credit score. But if you have a balance that's gone unpaid and it moves into collections, then it could have an impact," said Fabian.

The overdraft itself is invisible to the credit bureaus, but danger begins when you leave a negative balance too long. Most Canadian banks will close an account and forward the debt to a collection agency after roughly 60 to 90 days of a negative balance. Once that collections record appears on your credit report, it stays there for six to seven years depending on your province, even if you pay it back in full the next day.

How overdraft protection works and what it costs

Many banks offer a service called overdraft protection that pre-approves your account to dip below zero up to a set dollar limit. Richard Goyder, Chief Credit Risk Officer at Neo Financial, described the mechanics. "Overdraft protection is a pre-arranged overdraft where the bank in advance says your balance can go into negative territory up to a certain number of dollars, and generally comes with a fee and interest," noted Goyder.

At the Big Five banks (TD, RBC, CIBC, BMO, and Scotiabank), the standard monthly fee for overdraft protection is $5, plus interest on the overdrawn amount. Without that protection, a transaction that exceeds your balance will either be declined or trigger a non-sufficient funds (NSF) fee, which typically runs $45 to $50 per transaction at Canadian banks. However, if you happen to do your chequing through a Neo Everyday account, keep in mind there are no NSF fees at Neo.

Some banks also let you link your chequing account to a savings account, line of credit, or credit card to cover shortfalls. If the linked product is a line of credit or credit card, the transferred amount becomes borrowed money that is reported to the bureaus. Late payments on that linked product, or a jump in your credit utilization ratio from the transferred balance, can hurt your score in a way the overdraft itself never would.

Goyder was blunt about the bottom line. "Relying on overdrafts is a very expensive way of borrowing money, so you don't want to avoid it because it will impact your credit rating, but because you want to avoid the fees and interest that most banks will charge in case of overdraft," stated Goyder.

Practical ways to keep your account out of the red

The simplest defence is maintaining a small cash buffer in your chequing account at all times. Even $100 to $200 above your expected monthly outflows can absorb a timing mismatch between a payday deposit and an automatic bill payment.

Review your pre-authorized payments at least once a month. Forgotten subscriptions and annual renewals are among the most common triggers for overdrafts. Cancel anything you no longer use, and note the billing dates of the ones you keep so you can make sure funds are available.

If you are also trying to build or rebuild your credit while getting your cash flow under control, using a credit-building product alongside good chequing account habits can help. The Secured Neo Mastercard, for example, requires a refundable security deposit that sets your credit limit, so you cannot spend beyond what you have already set aside. Payments on a secured credit card are reported to the credit bureaus every month, which means on-time payments actively improve your credit history in a way that a chequing account never will.