- NSF Fees can Damage a Credit Score - Bongani
Bank account overdraft fees are, unfortunately, a relatively common occurrence. Overdrawn checking accounts are frequently the result of a miscalculation of available funds on the part of the account holder or the method by which the bank processes payments. Unpaid overdraft fees can be inserted on a consumer’s credit report and do damage his or her credit score. Like other unsecured debts, however, unpaid NSF fees are subject to a statute of limitations for debt collection.
How Bank Overdraft Fees Work
If an individual has overdraft protection and spends more than is currently present in his or her checking account, the bank will honor the amount spent. It will then charge an overdraft fee for each check or debit that cleared without the available funds being present. This fee is often referred to as an NSF or “non-sufficient funds” fee.
The individual is then liable for repaying the amount he or she spent in addition to each NSF charge. Unfortunately, few banks allow consumers to opt out of overdraft protection. Because of this, an individual could accrue hundreds of dollars worth of bank fees before noticing the problem.
Banks Turn Unpaid Account Fees Over to Collection Agencies
If a consumer is unwilling or unable to repay the amount he or she owes to the bank, the bank will eventually turn the account over to a collection agency. Although banks do not report checking account activity to the credit bureaus, collection agencies often report all delinquent accounts they purchase on the credit reports of the individuals who supposedly owe the debt.
A collection account will cause a lower credit score due to the fact that the entry is considered derogatory by all current credit scoring formulas. A collection account, however, will not appear on a credit report forever. The Fair Credit Reporting Act states that collection accounts must be removed after seven years.
See The Federal Reporting Period for Bad Debts
An Overdrawn Bank Account and NSF fee Can Result in a Lawsuit
Collection accounts are not a consumer’s only worry when his overdrawn bank account and the subsequent fees it accrued are turned over to a collection agency. Collection agencies will sometimes sue consumers for unpaid debts they purchase. If this occurs and the individual is not able to prove in court that the debt is invalid (or does not appear in court at all) the court will grant a judgment to the collection agency.
In addition to giving a collection agency the right in some states to garnish an individual’s wages or seize active bank accounts, a judgment will also be inserted on the individual’s credit report. Like collection accounts, judgments are restricted to only reporting for seven years. The problem here is that, depending on the statute of limitations in the debtor’s state, a collection agency can wait years to file a lawsuit. Thus, a judgment for the debt could appear on a credit report after the original collection account has been removed. This can leave an individual with credit damage for up to 14 years over a simple NSF fee.
Consumers are encouraged to do everything possible to pay off overdraft fees before the debts can be sent to a collection agency and damage their credit scores. If the overdraft fees are particularly high, a consumer may be able to have a portion of the fees waived simply for being a good customer. Individuals may also negotiate payment plans with their banks. Most importantly, once an overdraft fee has been paid, an individual should request a zero balance statement from the bank to prove that the debt has been satisfied in the event that the debt is mistakenly sold to a collection agency.
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Candice Edwards - Candice Gillingwater is a credit specialist and consumer advocate currently living in Georgia. Her goal is to educate the public about ...
