Credit Score Basics > Does a student overdraft affect credit rating?

Does a student overdraft affect credit rating?

Wollit Team2 minute read · Updated 17th September 2024

Managing money as a student in the UK can be tough, especially when you’re suddenly hit by an unexpected expense. Many students use overdrafts to help cover costs, but a student overdraft might affect your credit rating. Here’s how it works.

What is a student overdraft?

A student overdraft is a special kind of borrowing that lets you take out more money than you have in your bank accounts.

Most student bank accounts offer an arranged overdraft that is often interest-free for a set time. Arranged means that the overdraft allows you to go overdrawn (spend more than you have) up to a certain limit without paying fees.

A student overdraft essentially works as an emergency fund or safety net for your unexpected costs, like emergency repairs or surprise bills. The amount you can borrow depends on the bank and usually increases as you move through your studies.

How can a student overdraft affect my credit score?

Using your student overdraft can have both good and bad effects on your credit score.

If you use your arranged overdraft wisely, it can actually help establish and improve your credit score. Regularly using and paying back your overdraft shows lenders that you can handle credit responsibly. This can make it easier for you to get loans or credit cards in the future. Also, if you have an overdraft but don’t use it all the time, lenders see this positively. It means you have access to credit but aren’t relying on it too much.

On the other hand, going over your arranged overdraft limit can hurt your credit score. If you exceed your agreed limit, this is called an unarranged or unauthorised overdraft. This can lead to fees and may signal to lenders that you're having financial trouble. Also, frequently going over your limit or not paying back what you've borrowed can lead to negative marks on your credit report. This may make it harder for you to get approved for other types of credit later on.

Will using my overdraft always hurt my credit score?

Not at all. If you stay within your arranged limit and pay it off regularly, using your overdraft can actually help build your credit score. However, if you often exceed your limit or fail to repay, it could hurt your score.

What happens if I don’t use my overdraft?

If you don’t use your overdraft at all, it will still show up on your credit report as available credit but will show a balance of zero. This means it won’t negatively impact your score – in fact, it might improve it a bit since it shows that you don’t live on credit.

How else can I build my credit while in university?

Being a student is a great time to start preparing for your “real” adult life. This involves building your credit score so you can have access to great credit cards, loans, or even your first mortgage later on.

Here is what you need to do:

Register to vote, and update this registration every time you move. This helps verify your identity.
Pay all your bills on time. Make sure to set a Direct Debit whenever you can.
Avoid going into unarranged overdrafts.
Keep track of how much of your arranged overdraft you’re using.
And finally, consider signing up for a specialised credit-building service.

One of the specialised credit building apps that you can use 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 directly builds your credit history, the main factor that matters for your credit score. Eventually, the impact of a negative factor like an unauthorised overdraft will fade away and your new history of timely repayments will be far more important for the credit agencies and lenders as well.