What is an overdraft?
An overdraft lets you borrow money through your current account. Using your overdraft takes your current account balance below zero. Being overdrawn means you owe the bank money.
An overdraft is a type of revolving credit. You can borrow amounts up to your credit limit and there isn’t a set repayment schedule – you can repay amounts whenever you want.
Some bank accounts, especially student accounts, offer a certain amount of overdraft at 0% interest. Beyond that, you will be charged interest for using your overdraft.
Authorised vs unauthorised overdrafts
Overdrafts can be:
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Authorised (arranged)
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Unauthorised (unarranged)
An authorised overdraft means you have a pre-agreed overdraft limit with your bank.
An unauthorised overdraft is when you have spent more money than the amount in your current account or gone over your authorised overdraft limit.
Before April 2020, banks usually charged higher interest rates for unarranged overdrafts than arranged overdrafts.
But a change in the rules means banks must now charge a single APR for both authorised and unauthorised overdrafts, so customers can compare accounts more easily. Most UK banks charge about 40% interest on overdrafts.
Will my overdraft show on my credit report?
Your overdraft will appear on the debt section of your credit report.
Lenders will be able to see the following information:
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Your overdraft limit
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How much you are overdrawn by (at the point in time when the information is sent to the credit reference agency)
Simply having an overdraft facility agreed is unlikely to affect your credit score significantly. If you have an overdraft facility you don’t use at all, it will appear on your credit file as a balance of zero.
Being slightly overdrawn for short periods of time is unlikely to have a big effect on your credit rating.
Be aware that banks reserve the right to ask for an overdraft to be repaid in full at any point. Failing to do so could have a negative impact on your credit score.
Does applying for an overdraft affect your credit score?
Applying for an overdraft won’t usually affect your credit score.
When you apply for an overdraft, your bank will look at your credit history to assess whether you will be a reliable borrower or not.
Most will do this using a soft credit check. This won’t show on your credit report when it’s checked by other lenders (but you will be able to see it).
But some banks will do a hard credit check. This will be visible on your credit report but won’t necessarily damage your credit rating.
However, a lot of hard credit checks in a short amount of time could impact your credit score. This is because too many credit applications close to one another suggest that you are struggling for money.
Does an arranged overdraft affect your credit score?
Having an overdraft could have a positive impact on your credit score if you use it responsibly. Responsible use means:
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Staying within your authorised overdraft limit
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Making regular payments to reduce or clear your overdraft
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Not using an unauthorised overdraft
Not using your overdraft will lower your credit utilisation ratio, which can boost your credit score. Your credit utilisation ratio is the proportion of your total available credit you are currently using.
You should aim to keep your credit utilisation ratio below 25-30% to show lenders you’re in control of your spending and borrowing.
For example, if you had a £1,000 overdraft limit and £2,000 credit card limit and owed a total of £600, your credit utilisation ratio would be 20% (£600 is 20% of £3,000). But if you only had the credit card, the £600 debt would mean a credit utilisation ratio of 30% (£600 is 30% of £2,000).
Does an unarranged overdraft affect your credit score?
Banks often allow customers to carry on spending when they have reached their overdraft limit. Doing so will mean you are in your unauthorised or unarranged overdraft.
Use of an unarranged overdraft is likely to show up on your credit report and it will cause your credit score to go down. This is because using an unauthorised overdraft suggests you are not managing your money well.
Does a student overdraft affect your credit score?
Most student bank accounts offer a certain level of overdraft at 0% interest. This means you can borrow up to this figure without paying any interest.
If you stay within your credit limit and regularly pay down your overdraft, using your student overdraft can have a positive impact on your credit score.
But going into an unauthorised overdraft is likely to lead to a reduction in your credit score.
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Emma Lunn
Personal Finance Writer
Emma has been writing about personal finance for 20 years. She's passionate about helping people make better money decisions so they have the time and money to focus on the things they love. For her, that's racket sports, hiking, and travel.
