Does using or exceeding an overdraft affect your credit score

That’s the question we’ll be tackling in this guide. And we’ll be answering other important questions to do with overdrafts and your credit report. 

Your ability to get future loans, mortgages and other credit hinges on your past finances, so get in the know right here. 

What is your credit report?

Your credit report is a six-year history of how you have handled your current account, money and payments to lenders and bills companies. If you have kept up with payments for services and borrowing, you’ll have a good score. But if you have unpaid debt, such as a credit card debt, or it looks like you do not make payments on time, your score will decrease. 

Your credit history and your credit score are accessible by any lender you apply to for credit, or even banks when opening a bank account. It tells them if you are likely to pay back any credit. 

This will determine if you get the credit or get rejected.  

You can consult your credit report by going online and using websites belonging to credit reference agencies. 

Examples of popular credit reference agencies include Experian, TransUnion and Equifax. Always use an agency that is authorised and regulated by the Financial Conduct Authority. 

You may be able to use an agency without paying fees for so many weeks. Make sure you cancel with them before any subscription payment is debited. 

How does an overdraft work?

The technical definition of an overdraft is when you go overdrawn on your current account, i.e. if you go below a zero balance into a negative balance. 

This is usually not possible on savings accounts and your bank may prevent it from happening at all by blocking transactions. You will most probably be charged fees by banks when you are overdrawn. 

But overdrafts can be categorised as:

  1. An authorised or agreed overdraft
  2. An unauthorised overdraft

Authorised overdraft

An authorised or agreed overdraft is when you have a prior agreement with the bank to go below a zero balance on your current account. When you have an agreed overdraft facility, you will be given an overdraft limit. 

For example, you may be able to go overdrawn by £500, £1,000 or £2,000. You will have to pay back all of the money at a certain date or when requested. 

You may be charged interest for using the agreed overdraft, which should be explained before agreeing to the overdraft. Any fees or interest is usually lower than you would get from a loans company. 

Unauthorised overdraft

An unauthorised overdraft is when you have not been given an overdraft facility by your bank. Instead, you spend and go into a negative bank balance. 

Banks will typically allow this on some of their accounts to prevent you not being able to make the payment. One common reason for this happening is not realising bills are being paid by direct debit, making the bank account go overdrawn. You will only allow have the ability to go overdrawn by so much before the banks will reject the next transaction.  

It is likely that you’ll be charged fees and interest for this. 

Read this guide if you want to get out of overdraft debts!

Does an overdraft appear on your credit report?

Your current account overdraft will appear on your credit report. It will appear as a debt on an unauthorised overdraft, and it appears even when you have an agreed overdraft. If you have an agreed overdraft but are not currently using it, it will still appear but it will have a nil balance. 

Does applying for an overdraft affect your credit score?

A bank may check your credit history before adding an overdraft to your bank account – or before increasing your overdraft limit. 

However, applying for one is unlikely to have any real impact on your credit score. 

Does going into an overdraft affect your credit score?

Going into an overdraft may impact your credit score in different ways. 

If you go into an unarranged overdraft or exceed your agreed limit by spending money you don’t have, it will show up as a debt and decrease your score. 

But if you use an agreed overdraft sensibly, i.e. by having a low credit utilisation and paying it off regularly, it can improve your credit score. 

This shows that you can manage your money and pay back any borrowing on time.

Is it bad to use your overdraft every month?

If you use an arranged overdraft every month but continually pay it off, it can help you build up your credit score. However, you should not be using all of your credit utilisation (or close to the limit) as this shows you are relying too heavily on your overdraft. 

You may want to consider this budgeting resource to dial back how much of your overdraft you’re using. Managing accounts with overdrafts and lenders can be difficult, but putting a plan into place can make things easier. 

Does student overdraft affect your credit score?

Many student accounts in the UK offer students the option of an agreed overdraft. This is typically available throughout your time as a student and even in the first years after graduation. 

Your student overdraft works just like any other agreed overdraft. If you don’t go beyond your limit and pay it off frequently, your credit rating will improve – and vice versa.

Will using an overdraft stop me getting credit?

The ability to get further credit from a lender, whether it be a loan, overdrafts or a credit card, depends on your credit report. Thus, using an overdraft sensibly can have a positive impact on your credit report and improve your chances of getting credit. On the other hand, using an unarranged overdraft can deteriorate your credit report and stop you from accessing credit. 

Can overdrafts affect you getting a mortgage?

A mortgage lender will assess your finances with a toothcomb. You will be usually asked to provide them with three months’ worth of bank statements for your savings and current account. 

If you continually rely on an unauthorised or agreed overdraft, the mortgage provider will notice. This could cause you some problems, but it all depends on how you manage your overdrafts and wider finances. 

Should I pay off overdraft or credit card first?

You should pay off “priority debts” before any other type of debts. These are debts that carry serious consequences if you don’t repay, such as losing your home (mortgage) or even the threat of imprisonment (council tax). 

Credit card arrears and overdrafts are neither classified as a “priority debt” so there is no absolute answer that you should be paying either of them off first. Each situation is different and you may need to compare the debts and make a personal judgment. You could seek free advice from a charity to make a smart decision. 

You may want to consider the type of overdraft you have in this scenario. If you have an authorised overdraft with lower interest than your credit cards, then it makes sense to pay the credit cards off first as you will pay less back in total. 

But there are theories against this, namely the Snowball Method which you may want to consider. 

Solutions are available

If you are struggling with multiple debts on top of any overdraft facility, you should get more information on the various solutions for different situations. Using one of these solutions could save you money or make paying back the money you owe much quicker – sometimes both!

We have a dedicated page on the solutions for debtors – you can read all about them here!

Learn more about credit scores at MoneyNerd!

If you have more questions about overdrafts, lenders, interest and credit files, you can find a vast number of helpful resources and articles on the MoneyNerd site. We prioritise answering the most common questions asked by people in debt wanting a brighter financial future. 

And always remember that free money advice is just a call away; speak with a charity or Citizens Advice for fee-free support!

About the author

Scott Nelson

Scott Nelson is a financial services expert, with over 10 years’ experience in the industry, including 6 years in FCA regulated companies. Read more
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