What are the Consequences of a Credit Card Overdraft?

N. Madison

The main consequence of a credit card overdraft is the money it costs the credit card account holder. Credit card overdraft fees can add up and make it more difficult for a person to manage his credit card payments or even have extra cash to spend as he wishes. If credit card overdrafts cause a person to pay his bill late or keep his balance too close to his credit limit, they may also hurt his credit score. In some cases, credit card overdrafts can even contribute to a creditor’s decision to close an account holder's account or raise his interest rates.

Credit card overdrafts can be avoided by keeping track of one's spending.
Credit card overdrafts can be avoided by keeping track of one's spending.

The most obvious consequence of a credit card overdraft is an overdraft fee. This occurs when the charges to a person’s credit card exceed the amount he has as available credit. When this happens, a person’s creditor usually has the right to charge an overdraft fee. The amount of the fee varies from creditor to creditor but is often a significant amount of money.

Frequent credit card overdrafting may increase a card's interest rate.
Frequent credit card overdrafting may increase a card's interest rate.

In most cases, a person who is charged an overdraft fee can simply pay it, and that may put an end to his credit card overdraft consequences. Sometimes, however, a debtor is unable or unwilling to pay an overdraft fee by the date on his bill. If he waits too long, his bill payment may be late, and the debtor's credit score may suffer. For example, if an overdraft fee makes it difficult for a person to pay his bill, he may put it off. If he ends up being 30 days late or more, this may result in a negative mark on his credit report.

An overdraft fee can be paid to prevent negative credit consequences.
An overdraft fee can be paid to prevent negative credit consequences.

Sometimes credit card companies choose to close accounts because of past patterns of behavior. For example, if a person frequently has credit card overdrafts, a creditor may begin to consider him too much of a risk and close his account. Even if a credit card company does not decide to close an account holder's account for this reason, it may sometimes raise his interest rates. In such a case, the account holder can still use the credit card to make payments but has to pay more to enjoy purchasing products and services on credit.

Credit card overdrafts may be listed on an individual's credit report.
Credit card overdrafts may be listed on an individual's credit report.

A rare credit card overdraft may not hurt a person's credit score, but frequent episodes can have a negative effect on one’s credit. A person who has frequent overdrafts often has a credit balance that is close to his limit, even after he has paid his overdraft fees. Generally, having credit balances that are too close to the limit lowers a person’s credit score.

The terms of a credit card should outline what will happen in the event of a credit card overdraft.
The terms of a credit card should outline what will happen in the event of a credit card overdraft.

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Discussion Comments

bluedolphin

Just to clarify, overdraft occurs not only with credit cards, but also with debit cards. Debit cards can also go into overdraft and the same consequences apply.

I had a debit card overdraft occur once. I did not realize that my paycheck had not cleared yet and it went over when I bought something. I paid an overdraft fee which I was upset about. But thankfully, my money came in after a few days and I didn't have more fees applied. Generally, the longer an account remains in overdraft, the greater the overdraft fees. So it's important to get money into the account as soon as possible.

ZipLine

@fify-- But that's how credit cards work. Everything purchased with a credit card is technically like a loan that has to be paid back. It allows people to buy on credit and pay later.

Of course, it would be better for the consumer financial wise if the card got rejected instead of going into over-draft. But that also means that the person does not have access to money. And banks make a profit off of this with overdraft fees.

The wisest thing to do is to set up online banking and check the balance very often to make sure that there is enough money there.

fify

What I don't understand is, why don't cards get rejected when there aren't enough funds instead of over-drafting? Wouldn't it be much better for the consumer?

bythewell

@irontoenail - Unfortunately it's not that simple. I've heard of banks that will deliberately hold off on charging a card so that several amounts will hit at once and trigger an overdraft fee. Even the best credit cards tend to have confusing rules and fee structures and they change the rules with very little notice.

I have one myself, but I don't let them extend the credit past $500 and I try to never hit the overdraft.

irontoenail

@KoiwiGal - I know people like to think that is the ultimate solution, but it's just not practical for a lot of people in the modern world. You need to have a credit card in order to build up a credit history or you won't be able to get finance on a lot of things that aren't possible without it (like buying a house).

And you need a credit card in order to buy things online or over the phone as well.

In themselves, they aren't exactly evil. They just need to be managed properly. As long as you don't consider them to be a source of free money and just pay back the debt whenever you use them, you should be fine.

KoiwiGal

You need to be careful about this kind of thing, because it can quickly get out of control. Overdraft fees can end up compounding financial troubles to the point where it seems impossible to climb back out of debt.

Personally, I think the best option is to not have a credit card in the first place.

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