Does an overdraft affect your credit score in the UK?

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Have you ever tried to take out a loan, purchase something on finance, or even buy a house? If so, you’ll have likely come across the topic of credit scores and credit checks at some point during the process.

Credit scores, which are based on your borrowing history, provide a rough guide on your so-called “creditworthiness” and how it might influence any future applications to borrow money. But with so many financial factors at play in our daily lives, it can be difficult to understand what’s really impacting your credit score—and how.

Take overdrafts, for example.

As a common part of most current accounts, many of us are familiar with overdrafts. But do they impact our credit scores?

In this guide, we’ll explain everything there is to know, so you can understand your credit score and its influences.

What is an overdraft?

An overdraft is a system that allows you to borrow money by spending more than you have remaining in your bank or building society account.

To put it another way, overdrafts allow you to spend money you don’t currently have in your account, which you will then be required to repay.

An overdraft can be helpful as it provides a safety net. This can help to avoid awkward situations where a debit card might be declined, for example at the supermarket if the bill is a little higher than expected.

How does an overdraft work?

Imagine that you use a current account to pay for something and the value is higher than the amount of money in the account. Without an overdraft, this payment would be declined.

With an overdraft however, the bank will allow you to “overdraw” your account by withdrawing beyond the amount in the account. This will then show a negative balance on the account.

Once the account is overdrawn, you will be required to repay the amount borrowed and bring your balance back to zero or higher. If the balance isn’t repaid, the bank may apply interest or additional charges to the debt.

The amount that you are charged for entering your overdraft will depend on the type of overdraft that has been used.

Types of overdraft

There are two main types of overdraft: arranged and unarranged.

Arranged overdraft

An arranged overdraft is an agreement with the bank that you can be overdrawn up to a certain amount. Providing you remain within the agreed overdraft limit, you will have slightly more favourable repayment terms and interest charges.

It’s still important to repay an arranged overdraft to avoid additional fees or debt.

Unarranged overdraft

An unarranged overdraft is used when the account is overdrawn beyond the agreed amount. If an account doesn’t have an arranged overdraft, it will go into an unarranged overdraft as soon as the balance drops below zero.

It used to be the case that, with an unarranged overdraft, you may be charged higher fees and interest rates for any debts. Making it important to repay any unarranged overdraft usage as quickly as possible.

From April 2020 however, banks can only charge overdraft users a simple annual interest rate, without additional fees and charges. Instead, entering an unarranged overdraft may cause the bank to decline any further payments from the account until the balance is resolved.

It’s worth keeping in mind that, even though the overdraft fees don’t change, unarranged overdraft usage may still appear on your credit report.

Student overdraft

While arranged and unarranged overdrafts make up the two main types of overdraft, you may have also heard references to student overdrafts in the past. These are essentially special versions of arranged overdrafts, designed to encourage students to open an account.

A student overdraft works in the same way as any other arranged overdraft, only you will usually not be charged any interest while you are a student. At the end of the interest-free period, the usual arranged overdraft fee will apply. 

Does an overdraft appear on your credit report?

In short—yes, an overdraft will appear on your credit report.

This is because it is classed as a form of borrowing and your credit report reflects your borrowing history.

The impact an overdraft has on your credit score, however, will depend on the way you are using the overdraft.

Does an overdraft affect your credit score?

Depending on how you use it, an overdraft can have either a positive or negative impact on your credit score.

Broadly speaking, using an arranged overdraft in small amounts and paying it off within the agreed time frame can be positive for your credit rating. Whereas not repaying, or spending beyond the arranged overdraft limit, can be damaging to your credit score.

Does applying for an overdraft affect your credit score?

Whether or not an overdraft application will affect your credit score will depend on the way the lender processes applications.

When you apply for an overdraft, the lender will look at your credit report to determine your eligibility. If they perform what’s known as a “soft search”, it will not have an impact on your credit rating.

In some cases, lenders may carry out a “hard check” instead. This will appear on your credit report and will typically be visible there for around a year.

One overdraft application generally won’t impact your credit score. But if your report shows a lot of hard checks in a short space of time, it might give lenders the impression you’re having financial trouble and make them less likely to approve.

Does increasing your overdraft limit affect your credit score?

When you apply to increase your overdraft limit, similar to applying for an overdraft, your bank will check your credit report to determine whether you are eligible.

Just as is the case when applying for an overdraft, soft searches won’t appear on your credit report, but hard checks will—so it’s best to avoid multiple hard checks in a short space of time.

Credit utilisation, the amount of your available credit you are currently using, is another factor that can impact your credit score. It’s generally best to aim for approximately 30% credit utilisation. So if you’re increasing your overdraft, it’s worth keeping in mind how much of your total available credit of all sources is currently in use.

Does decreasing your overdraft limit affect your credit score?

Decreasing your overdraft limit will not directly impact your credit score, providing you continue to use your overdraft within the newly-agreed limit and repay on time.

Just as is the case when increasing your overdraft limit, it’s worth thinking about credit utilisation. Ideally you want to be using about 30% of the credit available to you, so decreasing your limit may increase your utilisation and impact your credit score as a result.

If decreasing your arranged overdraft substantially, or even removing it entirely, you may run the risk of slipping into an unarranged overdraft with your safety net now removed.

If this were to happen, entering an unarranged overdraft may impact your credit score if it is not repaid within the required time.

Does going into an arranged overdraft affect your credit score?

Entering your arranged overdraft is unlikely to negatively impact your credit score, providing you make any required repayments on time. In fact, if you regularly use and repay an arranged overdraft, it may even have a positive impact on your credit score.

Does going into an unarranged overdraft affect your credit score?

Entering an unarranged overdraft, which occurs when you are overdrawn by more than the arranged limit, can negatively impact your credit score if the balance is not settled within a short time.

How to improve your credit score

Here are some general guidelines for improving your credit score:

  • Keep on top of monthly repayments for any bills, debts, or other recurring finances
  • Register on the electoral roll
  • Use a credit card regularly and for small amounts, always repaying in full
  • Keep your credit utilisation under 30% of your credit limit

For more tips, you can read our full guide on how to improve your credit score.

Start comparing borrowing options to suit your credit score

No matter where your credit score currently stands, there are borrowing options available to you. To start exploring your borrowing options, simply head over to our free eligibility checker, let us know about yourself and what you’re looking for, and we’ll help you to find a suitable lender for your needs.

If you are currently paying off an overdraft, you may find that you are eligible for a debt consolidation loan with a lower rate than you are currently paying in overdraft interest.

Many banks and building societies have overdraft rates of 39.9% APR. By switching to a loan, you could potentially save money on interest and you’d be actively paying off your debt each month.

To see whether this is right for you, head to our eligibility checker to get started.

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