Does my overdraft affect my credit score?

Overdrafts can be handy, but if you're trying to improve your credit score, you might be concerned about yours. Do you need to worry?

Updated

Fact checked

The good news is that using an authorised overdraft sensibly won’t harm your credit score, but it will be on your credit report and visible to lenders.

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How do overdrafts work?

An overdraft is an ongoing line of credit that’s typically offered with a current account. When you use one, you’ll normally pay interest or fees for the privilege.

Banks and building societies tend to offer overdrafts of anywhere from £50 to £3,000, depending on your circumstances. The rate of interest that you pay can also vary dramatically from product to product. If you’re a student you might be lucky enough to have a 0% overdraft facility. Otherwise, if you bank with one of the larger, high-street banks and don’t always keep an eye on what they’re charging you, you could be shocked to find out that you’re paying a hefty daily fee each time you dip into your overdraft.

Overdrafts can be useful. If, for some reason, you have higher than normal outgoings, or some unexpected payments to make, it’s good to know that there’s a buffer in place. Millions of people use their overdraft every month and go back into the black when they are paid.

Your overdraft on your credit record

Your overdraft balance will show up on your credit file – if you use it you’ll be able to see the balance the last time your file was updated – and it counts towards the overall amount of credit available to you. That’s because of something called your credit utilisation ratio, sometimes called your debt-to-credit-limit ratio. This is how much you owe, compared with the total of the credit that’s available to you. In terms of your credit report, it’s a good idea to keep your credit utilisation ratio at reasonable levels at all times (say, 30% or lower). If it’s constantly high, this can hurt your credit score and give an impression of financial difficulty to would-be lenders.

If you are routinely in “unauthorised” overdraft territory, this is taken as a sign that you are struggling to budget and might have difficulty repaying credit. This could reduce the amount providers are willing to extend on credit cards, personal loans or other types of finance. Plus it’s not the best idea for you, as the further into your overdraft you go, the more interest you’ll be charged – and possibly the more fees you will incur, too, making it even harder to get out of overdraft dependency.

If you are completely unable to repay your overdraft, it’s possible that you will be referred to a debt collection agency, which would affect your score.

It’s certainly not all bad news, however. If, like most of us, you do regularly go into your overdraft and repay it monthly, this shows you are managing credit responsibly, and this can benefit your credit score.

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Overdraft dos and don’ts

Do:

  • Pay off your overdraft monthly
  • Budget to minimise how much you use it – it’s all to easy to see it as your money
  • Regularly check your credit score
  • Compare the cost of all forms of credit available – overdrafts can be a lot more expensive than promotional credit card rates, or low rate personal loans

Don’t:

  • Max out your overdraft every month
  • Rely on it for essential spending
  • Go over your authorised overdraft limit

The bottom line

It’s a good idea to avoid overdraft use for many reasons, but your credit score isn’t one of them. As long as you repay any overdraft you use every month and can do so easily, credit providers won’t mind you dipping in to it.

Warning lights only flash if you can’t repay your overdraft borrowings, are repeatedly going into your unauthorised overdraft, or are just stuck at or near your limit.

Read about how different factors can affect your score

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