Does overdraft affect credit score?

Credit Building

If you have a current account with a bank then there is a good chance that you also have an overdraft. These can be a convenient way to cover any shortfalls without the need to resort to a loan or credit card


That’s not to say that an overdraft is suitable for all circumstances. They come with fees and interest charges and are not intended as a long-term solution. If you are on the verge of applying for a new line of credit, you may be wondering does overdraft affect credit score. This is what we are going to take a look at here.

 

What is an overdraft?

First things first! It is worth looking briefly at what an overdraft actually is. In short, it is a line of credit that your bank allows you to access when you need to. It means that you can withdraw funds or pay a bill even when you don’t quite have enough money in your account. Your overdraft will have a limit and as long as you stick to this you can see reduced stress when it comes to paying your bills.

A basic example of how an overdraft might work looks like this:

  • You have a £100 balance in your account
  • A bill for £200 is due to go out
  • You have an overdraft limit of £1,000
  • Your payment goes out using your £100 and £100 of your overdraft.
  • You have now utilised 10% of your overdraft


You should aim to get out of your overdraft as soon as possible as the longer you are in it the more you are going to pay in interest and fees.


Does an overdraft appear on your credit file?

Before looking at the question, ‘does overdraft affect credit score?’ it is worth exploring if it appears on your credit file at all. The short, and of course the right, answer is that yes it does show up on your credit file and it is shown as a debt. If you are not using any of your overdraft it simply shows your balance as zero.


Often banks only report to credit reference agencies at the end of a month. This means that if you dip into your overdraft and then clear it quickly, it is unlikely that your credit report will even show that you have used it. 


So, how does overdraft affect credit score?

Assuming that you are using an arranged overdraft (one that has been approved by the bank) and that you are using it appropriately, there is a good chance that it will actually give your credit score a boost. Why? It is because you are showing that you can manage your money within limits and repay in a timely way. An unauthorised overdraft is an entirely different story.


If you go overdrawn without the bank agreeing to it, or if you exceed your agreed overdraft limit this will damage your credit score. It suggests that you are unable to manage your money and acts as a red flag to lenders.


The best way to use an overdraft to boost your credit score is to use it little and often. Ensure that when you dip into it you are able to clear it quickly. With the banks only reporting at the end of a month all that lenders will see is that you have repaid what you owe. Lenders are always happy to see this.


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