There are two types of overdraft:
- Authorised overdraft. An overdraft that the bank has agreed you can use.
- Unauthorised overdraft. An overdraft that the bank hasn’t signed off.
If you use an authorised overdraft, this has no impact on your credit score, so it is unlikely to have a huge influence on your mortgage application. However, unauthorised overdraft use will leave a black mark on your credit score for several years. This could destroy your chances of being approved for a mortgage.
How do mortgage lenders use your credit score?
Your credit score is an indicator of how reliable you’ve been when borrowing money. Financial transactions from up to seven years in the past can be recorded on your credit report and affect your credit score.
When you apply for a mortgage, lenders will check your credit score as part of their assessment of your creditworthiness. They will use an external credit reference agency to do this. The UK’s three major credit reference agencies are Callcredit, Equifax and Experian. Each agency will use a different algorithm to determine your credit score, while every lender will have different boundaries for what is an acceptable score. This is why one lender may approve you for a mortgage, while others won’t. You can check your credit score here.
How do mortgage lenders perceive overdraft usage?
Mortgage lenders may ask for details about your authorised overdraft as part of their affordability checks. Nevertheless, it’s generally regarded as “good credit” by lenders, so it’s unlikely to be perceived as a red flag.
Lenders prefer when an applicant doesn’t have too much access to credit, but most overdrafts have a limit of a few hundred pounds, which is unlikely to worry them.
However, if you regularly fall into an unauthorised overdraft, this is a clear sign you can’t manage your spending. Most lenders will be highly reluctant to lend to people who are this careless with their money.
Should I apply for an overdraft shortly before a mortgage application?
Whenever you apply for a form of credit, the provider will run a credit check on you. This produces a short-term knock to your credit score. As such, in the months leading up to a mortgage application, it’s recommended to only apply for financial products you really need.
If you’re someone who regularly runs the risk of falling into the red, it may be worth applying for an authorised overdraft. After all, falling into an unauthorised overdraft just before submitting your mortgage application could have a huge impact on your perceived creditworthiness.
Tips for building your credit score
If you’ve fallen into an unauthorised overdraft before, there is still hope for your mortgage application. Here are a few things you can do to repair your credit score:
- Make debt repayments on time. Your credit score increases whenever you show evidence of reliable borrowing, by making timely repayments for example. A credit card is a useful tool for regularly making timely repayments and building your credit score. If you pay off the debt in full every month, it won’t cost you a penny in interest. Consider applying for a credit card that’s designed specifically for people with bad credit.
- Pay utility and telecom bills by direct debit. Making timely repayments on these bills via direct debit will also help to boost your credit score. Watch out though! As with a credit card, a missed payment could harm your credit score even further.
- Don’t apply for too many financial products. Every time you apply for a financial product, the company will run a credit check on you. This produces a short-term hit on your credit score, so it’s best to refrain from applying for them in the months leading up to a mortgage application.
- Fix your credit report. It’s possible that there are errors on your credit record. These can have a detrimental effect on your credit score, so it’s worth checking for these mistakes and amending them. You can do this for free by getting in contact with any of the three major UK credit reference agencies – Experian, Equifax or Callcredit.
- Don’t fall into an unauthorised overdraft. Do whatever it takes to avoid this. It is a huge sign that you’re an unreliable borrower and could ruin your mortgage application.
. When you make major financial decisions, consider getting independent financial advice. Always consider your own circumstances when you compare products so you get what's right for you.