Does Using an Overdraft Affect Credit Score?

Does using an overdraft affect your credit score?

Yes, using an overdraft can affect your credit score, although simply having an arranged overdraft does not automatically damage it.

An overdraft is a form of credit and can appear on your credit report. How it affects your credit profile will depend on factors such as how much of the facility you use, whether you stay within your agreed limit and whether the account is managed as agreed.

Occasional use of an arranged overdraft that is regularly cleared is different from consistently using most of your overdraft limit or going into an unarranged overdraft.

What Is an Overdraft?

An overdraft allows you to spend more money than you currently have in your current account, up to an agreed limit where an arranged facility is in place.

There are two main types:

Arranged overdraft – your bank has agreed a borrowing limit in advance.

Unarranged overdraft – you spend beyond your available balance without an agreed facility, or go beyond your arranged overdraft limit.

Both are forms of borrowing, although the way they are recorded and managed can differ.

Do overdrafts appear on your credit report?

Yes. An overdraft can appear on your credit report as a credit account.

Your credit report can show information such as your overdraft limit and the balance reported by your bank at the time it sends information to the credit reference agency.

Because banks normally report account information periodically, very short-term overdraft use that is cleared before the reporting date may not always be reflected in the same way as an overdraft balance that remains outstanding.

An unarranged overdraft, missed payments or more serious account problems can also negatively affect your credit history.

How does an overdraft affect your credit score?

An arranged overdraft does not necessarily damage your credit score simply because it exists.

The impact will depend on how the facility is managed and the information reported by your bank.

Factors that may affect your credit profile include:

• Regularly using a high proportion of your overdraft limit
• Going beyond your arranged limit
• Remaining heavily overdrawn for long periods
• Missed or returned payments
• Defaults or other serious problems with the account
• Making multiple applications for additional credit in a short period

Credit reference agencies and individual lenders use their own scoring methods, so there is no single number of overdraft uses or fixed balance that automatically reduces everyone’s credit score.

Does an arranged overdraft affect your credit score?

It can, but an arranged overdraft that is kept within its agreed limit and managed responsibly is unlikely to have the same impact as persistent unarranged borrowing or exceeding the agreed limit.

The amount outstanding and how much of the available facility you use can form part of your overall credit profile.

Does an unarranged overdraft affect your credit score?

It can.

Regularly going into an unarranged overdraft or exceeding your agreed limit may suggest that you are struggling to manage the account and can have a negative effect on your credit profile.

More serious issues, such as an account falling into default, are likely to have a greater impact than occasional use of an arranged overdraft.

Does the size of your overdraft limit matter?

Potentially.

Credit reports can show your available credit and the amount you currently owe. A very large amount of available credit or consistently using a high proportion of your overdraft may therefore be relevant when another lender assesses a future credit application.

Simply having an unused overdraft limit does not mean that your credit score will automatically fall.

Does applying for an overdraft affect your credit score?

It can depend on how the bank carries out the application.

Some banks may use a soft credit search when considering an overdraft or increase in your existing limit. A soft search is not normally visible to other lenders.

Other applications may involve a hard credit search. A hard search appears on your credit report, and making several credit applications within a short period can affect how future lenders assess you.

If you are unsure, you can ask your bank whether an overdraft application or limit increase will involve a hard or soft credit search.

Does increasing your overdraft limit affect your credit score?

Requesting a higher overdraft limit may involve a credit check, depending on the bank.

If a hard credit search is completed, this will appear on your credit report. Increasing your available credit can also change the overall amount of credit available to you.

However, simply increasing the limit does not automatically mean your credit score will fall. The effect depends on the lender’s search, your wider credit history and how you subsequently use the facility.

How can you reduce the impact of an overdraft on your credit profile?

Where possible:

• Stay within your agreed overdraft limit
• Avoid relying on most of your available overdraft every month
• Reduce the balance when you can
• Avoid repeated unarranged overdraft use
• Make sure regular payments and direct debits are covered
• Check your credit report for any incorrect information
• Avoid making unnecessary credit applications within a short period

Your overdraft is only one part of your credit history. Other borrowing, payment history, credit applications and public-record information can also affect how lenders assess you.

Can an overdraft affect a mortgage application?

Yes, it can, although mortgage lenders consider more than your credit score.

They may also look at how you use your overdraft, your bank statements, income, expenditure, other financial commitments and overall affordability.

If you are planning to apply for a mortgage, read our guide to whether being in your overdraft affects getting a mortgage.

Frequently asked questions about overdrafts and credit scores

Does having an overdraft automatically reduce your credit score?

No. Simply having an arranged overdraft does not automatically mean your credit score will fall. The way the account is managed, the balance reported and your wider credit history can all be relevant.

Is it bad to use an arranged overdraft every month?

Regularly relying on an overdraft may be viewed differently from occasionally using it and then returning the account to credit. Persistent use of a large proportion of the available facility can indicate greater reliance on borrowing.

Does clearing an overdraft remove it from your credit report?

Clearing the balance does not necessarily remove the overdraft facility itself from your credit report. If the account remains open with an arranged overdraft limit, the facility may continue to be reported even when the balance is £0.

Is an overdraft the same as other debt?

An overdraft is a form of borrowing, but it works differently from a personal loan or credit card. It is attached to your current account and normally allows you to borrow up to an agreed limit when your account balance falls below zero.

Conclusion

Using an overdraft does not automatically damage your credit score.

An arranged overdraft that is kept within its agreed limit and managed responsibly is different from persistent overdraft reliance, repeatedly exceeding the limit or allowing the account to fall into more serious arrears.

Your overdraft is also only one part of your overall credit profile. Payment history, other borrowing, credit applications and the way your accounts are managed can all influence how lenders assess future credit applications.

Need help understanding how lenders will view your bank statements?

At Kerr & Watson, we help clients prepare for mortgage applications and understand how overdrafts, affordability, and credit profiles are assessed.

Speak to us today to understand how lenders may view your overdraft usage and secure the right mortgage for your circumstances.