Credit Score Basics > Does an unarranged overdraft affect credit score?

Does an unarranged overdraft affect credit score?

Wollit Team2 minute read · Updated 29th June 2024

Going into an unarranged overdraft can hurt your credit score quite a bit, especially if you have a history of often using unauthorised overdraft.

Let’s see how you can make sure that the impact of an unarranged overdraft on your credit score is as small as possible.

What is an unarranged overdraft?

An unarranged overdraft is when you spend more than what you have in your bank balance and either without having an agreed overdraft limit from your bank or spending more than the arranged overdraft limit allows.

This can often happen if you overlook bill payments which are paid via direct debit, leading to an overdrawn bank account. Banks may allow this for certain accounts to prevent payment failure, but it can also result in fees and high interest charges.

More importantly, unauthorised overdrafts can significantly harm your credit score if not repaid as soon as possible.

How can unarranged overdrafts affect my credit score?

If you don’t pay your overdraft off as soon as possible (usually within 1 to 5 days), the bank will report it to the credit reference agencies, who will include it on your credit report. This will also lower your credit score.

And if you often go over your overdraft limit, it will further hurt your credit score. A history of regularly using unauthorised overdraft is essentially a sign for lenders that you have challenges budgeting and planning ahead. Credit reference agencies like Experian, Equifax, and TransUnion are mindful of this, and as a result, they include it in the credit score calculations.

How can I reduce the impact of unauthorised overdraft on my credit score ?

The first thing you should do is make sure an unauthorised overdraft doesn’t happen in the first place. Here are some tips:

Check your account balance regularly to avoid any unexpected overdrafts.
Pay off any overdraft as soon as it happens. Overdrafts are not meant to be used regularly and they're not a great credit line because of the short repayment period and the high interest rate.
If you need access to credit more often consider signing up for a credit card instead. Credit cards can give you much longer interest free periods in which you can pay off your purchases and they also have higher credit limit than overdraft carrying current accounts.
Set up direct debits and make sure that you know when they will be coming out from your account.
Try to use an account or a bank that tells you in advance when a payment is coming up (Revolut, for example).
Consider downloading a budgeting app to plan your expenses better. Some of the best budgeting apps in the UK are Plum, Emma, and HyperJar.

However, if you've already had a few unauthorised overdrafts already, you'll also need to continue working on your credit history so that you can improve your credit score.

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.