When your check clears your bank account and you do not have enough funds to cover it, the bank may pay the check as a courtesy to you. Your account will have a negative balance, called an overdraft. Financial institutions do not report overdrafts to credit bureaus. However, if the negative balance remains unpaid, the bank will report it as a balance owed. In this case, it will affect your credit history and score. Overdrafts can also affect your credit file in several indirect ways.
Depending on a financial institution, overdraft fees can be as high as $35 or more. If you have several checks coming through and not enough balance to cover them, the bank will return them and charge an overdraft fee for each bounced check. The fees can add up to several hundred dollars. If you are unable to pay the fees, your account will be referred to a collector after 3-4 months. Collection accounts are reported on your credit file and may remain on it for up to seven years even after being paid off.
If you don’t pay the negative balance created by an overdraft, the bank can file a lawsuit and garnish your paycheck. Writing bad checks is illegal. Banks can press criminal charges against you if you continue writing checks without keeping enough funds in your account to cover them. Criminal charges and garnishments are reported to credit bureaus and will lower your score and may prevent you from obtaining credit.
When a check bounces, the payee will attempt to collect his or her money by contacting you. If you fail to pay them, they can also send you to collections. If you pay a bill and your check bounces, your account will be past due. Delinquent accounts are also reported to credit bureaus. The payee can also file criminal charges against you for check fraud.
If you are a first-time offender and bounce only one check, you bank will likely forgive you and may even refund the overdraft fee. However, do not make it a habit. If you continue writing bad checks, the bank can close your account and report it to ChexSystems. CheckSystems is not the same as credit bureaus, but having a record there may prevent you from opening a bank account at another financial institution.