Credit Score Basics > Does simply being in overdraft affect credit score?

Does simply being in overdraft affect credit score?

Wollit Team2 minute read · Updated 16th September 2024

Simply being in overdraft does not affect your credit score. However, the kind of overdraft you are using, how long you’ve been using it, and a few other factors can. Here is how this works.

What is an overdraft?

An overdraft is a service from banks that allows you to take out more money than you have in your account, up to a certain limit.

There are two main kinds of overdrafts:

Authorised overdraft: This is a limit that your bank agrees to let you borrow. It usually costs less than an unauthorised overdraft.
Unauthorised overdraft: This happens when you go over your agreed limit or take out money without permission. This type usually comes with higher fees and interest.

How do overdrafts show up on my credit report?

When you have an overdraft, it is recorded on your credit report. If you don’t use your overdraft, it will show a zero balance. If you do use it, the amount you owe will appear on your report.

Banks report this information to credit agencies every month, so if you pay off your overdraft before the report date, it may not show up.

Does having an overdraft affect my credit score?

Whether having an overdraft affects your credit score depends on how you use it:

If you stay within your overdraft limit and pay it off regularly, it can show lenders that you are responsible with money. This can help improve your credit score over time.
However, if you often go over your limit or use an unauthorised overdraft, it can make you look financially unstable to lenders. This could lower your credit score, as it suggests you may have trouble managing your money.

Does simply having an overdraft affect my credit score?

Having an overdraft does not usually hurt your credit score if you don’t use it. If you have an authorised overdraft but don’t use it, nothing really happens – your credit score is safe.

In fact, having access to credit and not using it can actually help your score by showing lenders that you can manage money.

What happens if I go into an unauthorised overdraft?

Going into an unauthorised overdraft is what can really hurt your credit score. It shows lenders that you might not be managing your money well, a clear warning sign.

Banks also charge higher fees for unauthorised overdrafts, making your situation worse.

How can I improve my credit score if I have an overdraft?

To improve your credit score while using an overdraft, try these tips:

Always make sure you don’t go over your authorised overdraft limit.
Try to pay off your overdraft balance quickly to avoid extra interest and fees.
Don’t rely on unauthorised overdrafts, as they can hurt your credit score.

Can using my overdraft improve my credit score?

Yes, using your overdraft wisely can help improve your credit score. If you use your overdraft and pay it off on time, it shows lenders that you are responsible, which can make you look better to them.

However, an overdraft is not a great credit-building tool. It’s unpredictable, can come with high fees, and it is not a way to build a history of consistent payments – which is what lenders want to see.

Luckily, now there are many apps that can help you build and improve credit.

One such app is Wollit. Wollit is an app available both on Android and iOS, and it works by reporting a fixed-fee monthly subscription as a loan repayment to all three credit reference agencies.

This helps you build a history of timely debt repayments, which is the main factor that matters for your credit score.

Over time, this can improve your credit score and reduce the impact of a negative entry in your credit report – be it an unauthorised overdraft, a missed payment, or something else.