From paying off credit cards and mortgages to taking out finance on a car or a personal loan, every loan application you make is logged and forms part of your personal credit score. Most people are aware that the money they borrow can have an impact on their credit, but one of the more complicated areas that often leads to confusion is whether using an overdraft can affect your credit score.
What is a credit score?
Any time you borrow money - or apply to do so - it will have an effect on your credit score in some way, leaving a trail of borrowing history that companies can see in order to determine whether or not they can lend to you. Your credit history also records any outstanding money you may owe to utility companies, landlords, and any County Court Judgements (CCJs) against you. On any given day, the way you have managed your money will contribute to your overall credit score and affect your prospects for being able to borrow.
Credit scores are important, because lenders use them, to make decisions about whether or not they should lend to you. Every time you apply to borrow money, your credit history and credit score will be used in the decision. If you’ve borrowed money in the past and paid it back responsibly, it will have had a positive impact on your credit score, and your ability to borrow. But if you’ve borrowed money and struggled to properly manage the debt, or if you’ve had problems with paying bills on time, this will be seen as a negative, lowering your credit score and making it harder to borrow.
Does being in your overdraft affect your credit score?
Being in overdraft with your bank can impact your credit score, but the answer isn’t always as straightforward as it seems. If you have an arranged overdraft, managing it well should mean it doesn’t affect your credit score. This means you need to be able to stay within your approved limit and be able to make regular payments.
However, an unauthorised overdraft, one which your bank has not agreed to, could have a seriously negative impact on your hopes of borrowing money. What’s important is that you avoid spending more money than you have, and that you make sure there are sufficient funds to cover your standing orders and direct debits when these are due to be paid. Always be aware of approximately how much money is available before you slip into your overdraft and keep an eye on the calendar, so you know when payments will be leaving your account.
Does an overdraft show on my credit report?
Use of an overdraft will be recorded on your credit report, but it’s not always a negative. So long as you’re using your overdraft responsibly, making sure it’s regularly paid off in full and you never exceed your limit, you should be perceived as a responsible borrower. The effects will only become negative if you’re using your overdraft every month over a long period of time, you never manage to repay it in full and you sometimes exceed your agreed limit. Whether or not you are hoping to secure a loan in the near future, an unauthorised overdraft can impact your ability to take out a loan.
For some people, the on-going fees on an unauthorised overdraft can also escalate, making it harder to pay back. Charged each month, or sometimes on a daily basis, the debt can quickly grow if you struggle to manage it.
In situations like this, the answer is to communicate with your bank as soon as possible to arrange a solution. The answer may be an authorised overdraft, a loan to tide you over or a carefully considered repayment plan that you can afford to manage.
Arranging an overdraft
The act of applying for an overdraft can affect your credit score, but it’s not always the case. Some banks will simply carry out internal checks before deciding whether or not to allow you an authorised overdraft. Others do perform hard credit checks with external agencies. These will leave an electronic footprint on your record, which can be negative if you are subsequently declined.
You can learn more about overdrafts and how to manage yours responsibly on the Citizens Advice Bureau website. It’s a good idea to ask your bank about the impact yours will have on your credit score if you’re unsure, or take a look at our comprehensive guide to all the factors that affect your credit score.