Can your overdraft have an impact on your credit score?

Find out here...

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When opening a current account with most banks, you’ll likely be given the offer to include an overdraft option as part of your bank account which, when used correctly, can give you more flexibility when it comes to your spending. 

However, overdrafts aren’t as simple as letting you spend more money than you have; they also come with some disadvantages and issues that you should be aware of as well.

In our guide about overdrafts and how they can affect your credit score, we’ll be looking into overdraft interest, the risks of getting into debt and how your credit report can be affected.

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What is an overdraft?

An overdraft acts as a form of credit that can be used in conjunction with your current account and it lets you spend money that you don’t actually have in your bank account at the time of spending. 

An overdraft works by letting you pay for something through your bank account even if there is no money in your account. 

There are two types of overdraft that can affect your credit score that you should be aware of:

  • An authorised overdraft
  • An unauthorised overdraft.

An authorised overdraft is one that you have applied for and that has been accepted and approved by your bank.

An unauthorised one is an overdraft that you haven’t applied for, but one that lets you use it anyway; this type of overdraft is usually much more expensive as the bank isn’t aware of your extra spending intentions beforehand, so you’ll likely be charged much more interest.

Do I need an overdraft?

Whether you need an overdraft or not is dependent on your own personal financial situation and whether you think you need the extra breathing room when it comes to spending money that you don’t really have.

Having said this, they can be a slippery slope in terms of getting into debt, especially if you’re unable to pay off your overdraft and this can lead to bad credit scores and your credit rating will be affected.

If you intend to use an overdraft during the short-term or for emergencies-only, then you might want to consider getting one as part of your current account, but if you’re not sure that you can be held accountable to not overspend on it, then it’s probably best to avoid getting one. 

Can an overdraft help to improve my credit score?

While it is possible for an overdraft to negatively affect your credit score, it’s also possible for it to help improve your credit score as well, providing that you stay within your credit limit, you pay off your overdraft within the necessary timeframe and you avoid getting an unauthorised overdraft.

Does increasing my overdraft limit hurt my credit rating?

If you intend to increase your overdraft limit, it’s important that you’re aware of the risk of negatively affecting your credit rating by doing so. When you make an application to increase your overdraft limit, the bank will check your credit history to see whether you’re a reliable borrower and as this is usually done with a soft search, it shouldn’t have any impact on your credit rating.

However, some banks will carry out a hard search which does leave a mark on your credit report which other lenders can then see. Providing that you don’t make too many credit applications within a short space of time, your credit score and rating shouldn’t be affected too much.

You might like: What factors can affect your credit rating?

Do overdrafts affect getting a mortgage?

Similarly to the point above, it is possible for an overdraft to have an effect on your mortgage application as lenders will check your financial history via your credit report and often your bank statements as well.

If you constantly go overdrawn, struggle to pay off your overdraft or find yourself in a situation where you’ve got an unauthorised overdraft, then these factors can all have an effect on you being accepted for a mortgage.

What happens if I go overdrawn?

When you go overdrawn, your bank will likely start to charge you interest that must be repaid with the overdraft amount within the agreed-upon period of time. 

If you have an authorised overdraft, you may be able to just pay the overdraft off without having to pay any additional interest charges, but an unauthorised overdraft will likely cost you a pretty penny in terms of interest and associated fees.

Does a student overdraft affect your credit score?

A student overdraft shouldn’t have too much of an effect on your credit score, as long as you pay it off within the expected timeframe.

What happens if I can't pay my overdraft?

If you’re unable to pay your overdraft, your bank will likely report this to your credit file and if you have a prolonged period of time where you don’t pay your overdraft, you could end up defaulting on your bank account which will remain on your credit file for up to six years.

Can I pay off my overdraft in instalments?

Unlike other types of credit which usually come with a set repayment plan and proposed repayment period of time in place, repaying your overdraft can be done in your own time, to an extent.

You’re usually given the option to choose your overdraft agreement terms and conditions which you must arrange with your bank.

How to get rid of your overdraft

There are several steps you can take to try and get rid of your overdraft, including:

  • Remain in control of your finances and keep track of all your spending by budgeting.
  • Work out a repayment plan that suits both you and your bank so that you don’t have to pay a lot of money back in a short period of time.
  • Switch to an account that doesn’t have an overdraft facility so that you’re not tempted to overspend.
  • Switch to an overdraft account that has lower fees and interest rates so you don’t have to pay as much back when you make your overdraft repayments.

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