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How does an overdraft affect my credit score?

An overdraft could help you get out of a tight spot if you need some short-term funds, but if you don’t manage it properly your credit score can take a hit. Find out how going into the red could impact your rating – and how to avoid the pitfalls.

An overdraft could help you get out of a tight spot if you need some short-term funds, but if you don’t manage it properly your credit score can take a hit. Find out how going into the red could impact your rating – and how to avoid the pitfalls.

Written by
Sajni Shah
Consumer money expert
Last Updated
8 min read
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Why your credit score is important

Your credit score is used by lenders to decide whether you’re a high or low-risk borrower – in other words, whether you can be relied on to pay back any money you owe. It’s based on how you’ve managed money in the past.

With a good credit score, you’ll find it easier to get mortgages, personal loans and credit cards. You’re also more likely to have access to lower interest rates and be able to borrow more, as well as enjoy the perks of promotional offers depending on the provider you’re dealing with.

There are three main credit reference agencies (CRAs) in the UK: Experian, Equifax and TransUnion. These agencies keep a record of your financial history and your bank sends them information about your activity, usually on a monthly basis. This goes towards establishing your credit score.

Companies eligible to do so, including authorised lenders, can run searches through CRAs to get the details of your credit report and your credit score.

Certain actions can impact your credit score, either positively or negatively – and this includes the way you manage your overdrafts.

Does having an overdraft affect your credit score?

Simply having an overdraft is unlikely to impact your credit score significantly, but the way you manage it could do – both positively and negatively.
An overdraft is a way of borrowing through your current account and it’s either arranged (authorised) or unarranged (unauthorised).

  • An arranged overdraft is one that’s been agreed with your bank and it allows you to borrow extra money, up to a set limit.
  • An unarranged overdraft is one your bank may let you use even though you haven’t applied for it, or if you go over your agreed limit.

For example, if your overdraft is £200 and you have £100 in your account but spend £150, you’re £50 overdrawn. This overspending is covered by your overdraft agreement, but you will have to pay interest on the amount overdrawn until you pay it off, unless you stay within any interest free buffer agreed with your bank. Any overdrawn amount will show up as a debt on your credit file.

How do new rules on overdrafts affect me and my credit score?

Previously, going into an unauthorised overdraft meant higher interest rates and daily or monthly fees or penalties. However, rules imposed by the Financial Conduct Authority in 2020 mean that banks can only charge you a simple annual interest rate on your overdraft and no extra fees, regardless of whether it’s arranged or unarranged.

However, going into an unauthorised overdraft could still have a greater impact on your credit score as lenders may see it as a sign that you’re not in control of your finances. It’s also worth knowing that many lenders have increased their annual interest rates as a result of these changes, which means you could end up paying more to use your overdraft and you might find it harder to get out of debt.

Does using your overdraft affect your credit score?

Provided you pay back what you owe in line with your bank’s terms and conditions and don’t go over your agreed overdraft limit, there’s unlikely to be any negative impact on your credit score. In fact, if you stay within your limit and pay back your overdraft regularly, it might even boost your credit score as lenders can see you’re managing your money responsibly.

But if you exceed your agreed limit, or don’t have an authorised overdraft in place but still spend more than you have in your current account, it could have a negative impact on your credit score. It suggests to prospective lenders that you may not be in control of your spending.

Failing to pay off your overdraft, or being in the red (having a negative account balance) on a regular basis or for months at a time, could also impact your credit score for the same reason.

Does an overdraft appear on your credit history?

If you have an active overdraft, it shows up as a debt in the current account section of your credit report.

Lenders will be able to see:

  • What your overdraft limit is
  • How often you use it
  • How much you spend when you get overdrawn
  • How often you pay back what you owe.

However, if you rarely use your overdraft and only for short periods when you do, your overdraft use might not show up in your credit history at all. This is because banks and building societies tend to send information to the CRAs just once a month.

Does paying off your overdraft improve your credit score?

Paying off your overdraft responsibly could actually improve your credit score by showing that you’re a reliable borrower. This involves:

  • Staying within your overdraft limit
  • Making regular payments to clear your overdraft – or spending less so your overdraft decreases
  • Using arranged rather than unarranged overdrafts.

What happens if you can’t pay off your overdraft?

Late or missed payments will damage your credit score and can stay on your credit record for six years. This could make it more expensive to borrow money or get a mortgage when you need it.

This is reason enough to keep on top of your overdraft repayments. Our guide to paying off your overdraft could help.

If you think your finances are getting out of control, talk to your bank. They may be able to suggest a solution. Have a look at our guide to getting out of debt too.

Does this mean overdrafts aren’t a good idea?

Not necessarily. As a short-term loan, an arranged overdraft could be a life saver. If you’re faced with unexpected costs, such as your car breaking down or a boiler packing up, you’ll be able to cover the extra spend with minimal stress, overdraft-limit permitting.

An overdraft also gives you the option to pay the money back over several months, if you can’t clear the debt completely when your next pay day comes around. However, be aware that interest rates on overdrafts are often very high. Many big-name high street banks are now charging around 40% equivalent annual rate (EAR), but you can still find banks and building societies with overdraft charges of around 20% EAR or less.

What are the alternatives to having an overdraft?

Firstly, overdrafts aren’t compulsory. You can opt out of having one.

Following a strict monthly budget is a way to steer clear of overdrafts and make sure you don’t spend beyond your means.

Certain credit cards and loans may also offer you a viable alternative to living in the red – and many come with lower interest rates than overdrafts.

If you have multiple existing debts, a debt consolidation loan might help you climb out of debt. You’ll be able to pay off the money you owe and replace multiple lenders with just one, to make repayments easier to manage.

But taking on a new debt is a big decision, as extending the length of the debt can mean paying more interest and could cost more in the long run. Plus, you may have to pay early repayment charges on your existing debt.

Whether you’re looking for a loan or a credit card, always read the small print and make sure you’re clear on the interest rate and terms of repayment before committing.

Comparethemarket Limited acts as a credit broker, not a lender. To apply you must be a UK resident and aged 18 or over. Credit is subject to status and eligibility.

Frequently asked questions

Does simply applying for an overdraft affect your credit score?

When you apply for an overdraft, your bank will carry out a ‘hard search’ on your credit history, and this will show up on your credit report, typically for one year. One-off hard searches may lower your credit score slightly, because they show you’re looking to take on new debt, but your score will usually rebound quickly if you manage that debt responsibly.

However, if you make multiple applications for credit in a short space of time, it could suggest you’re having problems managing your finances and this might affect your credit score.

Many lenders will allow you to check your eligibility before you apply for an overdraft, by doing a ‘soft search’ on your credit file. Soft credit checks don’t impact your credit rating.

Does increasing your overdraft affect your credit score?

If you ask your bank to increase your overdraft limit, they may choose to do a hard search on your credit file. This could impact your credit score to a degree because it shows that you’re looking to increase your debt. But so long as you prove you can manage the debt responsibly, any impact should be minor and temporary.

Regularly increasing your overdraft, or applying for different types of credit, could signal to lenders that you’re struggling financially and have a greater impact on your credit score. Bear in mind too, that increasing your overdraft might not be the best borrowing option for you as they typically have high interest rates. It’s worth checking if you’d be better off with a credit card or loan.

Does a student overdraft affect your credit score?

When you apply for a student overdraft, you’ll need to go through the relevant credit checks to be accepted and this could temporarily affect your credit score.

But the real impact comes down to how you manage your student overdraft. If you stay well within your limits and keep up with regular payments, it could raise your credit score. Go over your limits and miss payments and it could have a negative effect.

Although student bank accounts often come with an interest-free overdraft, you’ll still have to pay back whatever you borrow. Switching your student account to a graduate account gives you longer to pay off the overdraft, but you should aim to do so before interest charges kick in as these can be considerable.

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