Credit Building > Is having an overdraft good for credit rating?

Is having an overdraft good for credit rating?

Wollit Team1 minute read · Updated 1st July 2024

Yes, if used responsibly, having an overdraft could be good for your credit score.

First, having an arranged overdraft and using it responsibly can improve your credit score. Lenders like to see that you have access to credit you are not fully using.

What does "responsibly" mean? According to Experian, using less than 25% of your credit limit. So if your overdraft limit is £1000, try to not use more than £250 per month.

Second, regularly paying off your overdraft balance can help build a positive credit history and boost your credit score. It's just like a loan or a credit-building card. A history of timely loan repayments makes up about 35% of your credit score.

Third, maintaining an overdraft account for an extended period can also help your credit history, which can benefit your credit score. The age of your credit accounts is another 10-15% of what goes into your credit score.

Should I use an overdraft to build my credit rating?

You could, but you have to be very careful. Because overdrafts tend to have low limits, usually between £250 and £3000, it can be all too easy to go into an unarranged overdraft.

An unarranged overdraft is reported to credit reference agencies, and it will hurt your credit score as it can be taken as a sign that you may be struggling financially.

Instead, we suggest you look into other tools:

Credit-building cards. They also come with high interest rates, but at least tend to have higher limits than overdrafts, which can make it easier to stay under Experian's recommended 25% credit utilization ratio.
Speaking of Experian, you should also consider Experian Boost. It's a free service that allows you to report your regular subscriptions and payments (like Council Tax or Netflix) to Experian and make them count towards your Experian credit score.
Credit-building apps like Wollit. Wollit reports your monthly subscription as loan repayment, helping you build your credit history without the risk of high fees and interest rates. It also reports your rent payments to Experian, allowing you to add another line to your credit report which shows you're financially reliable.