How Does an Overdraft Impact Your Credit Score?

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If you have a current account, you likely have access to an overdraft. While this financial buffer can be very useful, it's important to understand how using your overdraft might affect your credit score. See our guide on stoozing, which shows you how to earn passively by using your 0% overdraft to save in a high-interest savings account.

What Is an Overdraft?

An overdraft is a form of credit linked to your current account that allows you to withdraw funds or pay bills even if your account balance is insufficient. For example, if you have £50 in your account but need to pay a £150 bill, an overdraft would enable you to cover the bill, leaving you with a balance of -£100.

Authorised vs. Unauthorised Overdrafts

The difference between these two types of overdrafts is straightforward. An authorised overdraft is one you've applied for and had approved by your bank. In contrast, an unauthorised overdraft occurs when your bank allows you to spend more than your approved limit without prior agreement. Unauthorised overdrafts are usually much more expensive and can result in additional charges if you exceed your authorised limit.

Using either type of overdraft can influence your credit score.

Does an Overdraft Appear on My Credit Report?

Yes, an overdraft will appear on your credit report as a form of debt. If you don’t use your overdraft, it will show a zero balance. However, if you are using your overdraft, the amount owed will be reflected on your credit report.

If you only dip into your overdraft occasionally and repay it by the end of the month when you get paid, it might not always appear on your credit report. This is because most banks and building societies report to credit agencies once a month, typically showing your account status on a specific day, which may miss temporary overdraft usage.

However, if you've used an unauthorised overdraft or incurred charges for not repaying your overdraft, this will definitely appear on your credit report. This could negatively impact your credit score.

Does an Overdraft Affect Your Credit Score?

An authorised overdraft is unlikely to have a significant impact on your credit score as long as you stay within your limit and avoid missed payments. In fact, responsible use of an overdraft, such as staying within your agreed limit and regularly repaying it, can improve your credit rating. This is because it demonstrates to lenders that you are a reliable borrower.

However, mismanaging your overdraft—such as regularly exceeding your limit—can harm your credit score, as it signals to lenders that you might be struggling financially. Additionally, your overall level of unsecured borrowing, including any overdraft debt, is considered by lenders when assessing your creditworthiness.

Can an Overdraft Improve Your Credit Rating?

Yes, an overdraft can positively impact your credit rating if used wisely. This means:

• Staying well within your limit.

• Regularly repaying your overdraft.

• Avoiding unauthorised overdraft usage.

Does an Unauthorised Overdraft Affect Your Credit Rating?

Absolutely. Frequently using an unauthorised overdraft can damage your credit rating, as it suggests to lenders that you may have difficulty managing your finances. If you’ve used an unauthorised overdraft, you might want to read our guide on improving your credit rating.

Does Increasing Your Overdraft Affect Your Credit Rating?

When you request an overdraft increase, your bank will review your credit history to determine your reliability as a borrower. Often, this involves a soft credit check, which won’t be visible to other lenders. However, some banks may perform a hard search, which will appear on your credit report. While a hard search doesn’t necessarily harm your credit score, making multiple applications for credit in a short period can signal financial distress to lenders, potentially affecting your score.

Does an Overdraft Affect a Mortgage Application?

When you apply for a mortgage, your financial history will be closely examined. Lenders typically request three months of bank statements, so regular use of an overdraft will be evident. If you're frequently close to your overdraft limit, rarely pay it off, or use an unauthorised overdraft, it could affect your mortgage eligibility, as these behaviors may indicate financial instability.

This information has been obtained from Experian. To better understand your financial standing, check your credit rating regularly.