An overdraft is a useful stop-gap, especially towards the end of the month. So does it affect your credit score — and if so, how much?
What an overdraft is#
An overdraft is a form of limited credit available on many bank and building society current accounts. It lets you borrow more than your balance holds.
Say you need to pay a £120 electricity bill but only have £20 in your account. Without an overdraft the payment is declined. With one, it goes through, and you're left with a negative balance of £100 to pay back — possibly with charges and interest accumulating on what you've borrowed.
There are two kinds:
- Authorised, or arranged, overdrafts — approved by your bank or building society, either through an application or as part of the agreement when you opened the account.
- Unauthorised, or unarranged, overdrafts — automatically available on your current account, with no formal application.
Does using one affect your score?#
An overdraft in itself won't affect your credit score. As with any credit agreement, it's how you use it that counts.
An unused overdraft — the facility is there, but you're not borrowing — shows a "zero balance" on your credit report, meaning no outstanding debt. It's much like holding a credit card you don't use.
An overdraft in use shows up as a debt. Being in the red can feel uncomfortable, but as long as you clear that negative balance quickly and routinely, using an overdraft can actually help your credit score.
Evidence of settling a debt is generally a plus, and it feeds into the score calculated from data held by the three credit reference agencies — Experian, Equifax and TransUnion.
That said, credit scores are a subjective interpretation of the information available about you. Your score is mostly a barometer of your own creditworthiness, and each provider measures it differently.
How it shows on your credit report#
It isn't only regular repayment that gets noted. Missed or late payments on your overdraft appear too, and will count against your score.
If a credit score is your financial history at a glance, your credit report is your financial CV. Lenders can see your overdraft limit, how often you use it, and — more importantly — how often you repay and settle what's outstanding. They then typically use that to calculate their own score for you, based on their own models and criteria.
One quirk worth knowing: an overdraft repaid quickly by month end may not register on your credit report at all. Your bank updates the agencies monthly, and it can take four to six weeks for new information to appear. If that update lands on a day when your overdraft isn't in use, your report may simply show an account with a zero balance.
What happens when you apply for one#
When you apply, the bank or building society runs either a hard or a soft search. The date, the type, and who performed it are all recorded on your report.
Soft searches have no impact on your score. They're usually done when getting a finance quote, or applying for accommodation or employment, and only access public information such as your Electoral Roll listing or court records.
Hard searches — credit application searches — provide much more detail and stay on your report for up to two years. These happen when you formally apply for new credit. The result isn't recorded, which is precisely why a lot of hard checks in a short period can hurt: they introduce uncertainty. Have you been accepted for a great deal of credit, or rejected repeatedly?
Common questions#
Is using my overdraft regularly bad?
Not necessarily — it depends on management. Consistently repaying quickly and staying within your limit demonstrates responsible borrowing and may help your score. Frequent or prolonged use, especially when you can't clear the balance, signals financial stress to lenders and works against you.
What's the main disadvantage?
High fees and interest, particularly on unauthorised overdrafts. Missing repayments or exceeding your limit brings both extra charges and score damage. Overdrafts work best as short-term solutions, not ongoing credit.
Overdraft or credit card?
It depends on your habits. Overdrafts suit short-term, emergency expenses but often carry higher fees. Credit cards may offer lower interest rates, rewards and more flexibility if managed well. Both affect your score, so use either responsibly and repay on time.
Arranged vs unarranged — what's the difference to my score?
An arranged overdraft is pre-approved and counts as credit; used responsibly and repaid on time it won't harm your score, and the evidence of repayment could help it. An unarranged overdraft is when you exceed your balance without agreeing it first. Your bank may apply penalties such as interest on what you owe, and that will show on your report and could lower your score.
What about a student overdraft?
Most student and graduate accounts come with an interest-free arranged overdraft designed for short-term borrowing during your studies. Because it's pre-approved, it won't hurt your score unless you exceed the limit or fail to repay. Once the account converts to a standard one, any remaining balance may start accruing interest — so keep payments on time.
The key things to remember#
- An overdraft itself will not prevent a good credit score.
- An overdraft used well can help build it.
- An unpaid or late-paid overdraft is detrimental.
- Be mindful of making too many overdraft applications in a short period.
- Hard searches stay on your report for up to two years.
- Updates take four to six weeks, so a quickly-cleared overdraft may never show.