Overdrafts are a common feature of UK bank accounts, offering a safety net when money runs low. But how does being overdrawn impact your credit score? This in-depth guide will explain what overdrafts are and how they affect your credit report.

• Using an overdraft can affect your credit score, depending on how it’s managed
• Both arranged and unarranged overdrafts might appear on your credit report
• Regularly using your overdraft or exceeding your limit can negatively impact your credit rating
• Responsible overdraft use might help build your credit history
• Applying for or increasing an overdraft could trigger a credit check

An overdraft is a short-term way of borrowing on your current account, letting you spend more money than you have in your balance. You might think of it like a small loan from your bank that kicks in when your account goes below £0. 

For example, if you have £50 in your account and need to pay a £100 bill, an overdraft could allow the transaction by taking your balance to -£50.

There are two types of overdrafts:

• Arranged or authorised overdraft: This is an overdraft limit you set up with your bank in advance. The bank agrees that you can go overdrawn up to a certain amount (for example, £500). You can dip into this buffer when needed and typically pay interest on the amount you borrow. Some banks might offer a small interest-free buffer (for example, the first £25) as part of an arranged overdraft. 
• Unarranged or unauthorised overdraft: This happens if you spend more than you have without an agreement or if you exceed your arranged overdraft limit. Essentially, the bank is covering payments beyond your approved limit. Unarranged overdrafts often incur higher interest or fees, and transactions might be declined. Using an unarranged overdraft is a red flag, as it means you’re borrowing without permission.

People might use overdrafts as a convenience for short-term needs. Common reasons include covering an unexpected bill just before payday or managing a temporary shortfall in cash. 

But overdrafts are best for emergency or occasional use. They're not suited for long-term borrowing, because interest rates on overdrafts can be quite high, sometimes up to 40% EAR (Effective Annual interest Rate).

An overdraft can affect your credit score (opens in a new tab), depending on how you use it. Simply having an arranged overdraft on your account isn’t necessarily bad for your credit score. The key factor is whether you use it responsibly.

Arranged overdrafts used within the agreed limits can have a neutral or even positive effect. Unarranged overdrafts, or consistently maxing out any overdraft limit, will likely harm your credit score.

Key overdraft factors that influence your score:

• How often you use it: Regularly being in your overdraft, especially for most of the month, can suggest financial strain and might lower your score.
• How much of it you use: Consistently using a large portion of your overdraft (e.g. 90% of your limit) can signal risk to lenders, similar to high credit card usage.
• Going over your limit: Exceeding your arranged overdraft puts you into unarranged territory, which can lead to fees and negative marks on your credit file.
• How long you stay overdrawn: Short dips are less concerning, but long-term overdraft use can indicate ongoing financial issues and hurt your score.
• Missed payments or defaults: If you don’t repay your overdraft, your account could be marked as in arrears or defaulted, which can stay on your credit report for six years (opens in a new tab).
• Total debt levels: Your overdraft adds to your unsecured debt. High overall borrowing can affect your debt-to-income ratio and influence lending decisions.

Occasional, well-managed overdraft use is unlikely to cause harm. But frequent, high, or unarranged use can damage your credit standing.

Applying for or changing your overdraft can impact your credit score, depending on how it’s handled and how often you apply.

When you apply for an overdraft, your bank will usually carry out a credit check to assess your eligibility. This might be a soft search, which doesn’t affect your credit score, or a hard search, which does leave a temporary mark on your credit report. A single hard search may slightly lower your score, but the impact is typically small and short-lived.

Making several overdraft applications in a short space of time can harm your credit score. Each hard search adds to your credit file and may signal to lenders that you’re struggling financially. To avoid this, use eligibility checkers that perform soft searches before applying.

Requesting a higher overdraft limit can also trigger a credit check. If approved, a higher limit that you don’t fully use could improve your credit utilisation ratio. But if you immediately max out the new limit or regularly rely on it, it might negatively affect your score.

Using your overdraft will affect your credit score if you use it excessively or irresponsibly, but moderate use within your agreed limit has little impact. In other words, how you use it matters more than the fact that you use it at all.

• Occasional use: If you occasionally go into your arranged overdraft and pay it off promptly, that activity will likely have no negative effect on your score. It might not even be recorded if the timing is short. Successfully managing an overdraft (by staying within the limit and clearing it) can show lenders that you reliably handle credit.
• Consistent use: If you’re consistently using your overdraft to its full extent or if you slip into an unarranged overdraft, then your credit score can be negatively affected. Frequent or heavy overdraft usage is a sign of financial stress. Credit scoring models and lenders look at patterns, like being overdrawn each month or incurring overdraft fees. 

One important aspect is whether you repay your overdraft on time. Although an overdraft doesn’t have formal monthly repayments like a loan, you're regularly expected to bring your account back to a positive (or zero) balance.

If you’re unable to repay your overdraft, here’s what could happen:

• Interest builds up: Even without extra fees, high interest rates can cause your debt to grow quickly if you’re only covering the charges. After 2020, banks can’t charge extra for unarranged overdrafts beyond the standard interest rate, but that interest can still be high.
• Account in arrears: If you stop bringing your balance back into credit (or at least pay the minimum required amount), your bank might flag your account as in arrears and report it to credit agencies.
• Default and collections: The bank could cancel your overdraft and demand repayment. If unpaid, your account may be closed, and the debt passed to collections, with a default recorded on your credit file for six years.
• Knock-on effects: Missed payments on other bills (like a Direct Debit that bounces) can also damage your credit score, creating a domino effect.

If you’re struggling, speak to your bank (opens in a new tab) or get support from a free debt advice service (opens in a new tab) early. The sooner you act, the more options you’ll have.

Yes – but only if you use it in a controlled, responsible way. At best, it can contribute positively by showing good financial behaviour.

To protect your credit score and avoid debt, it’s important to use your overdraft wisely. Here are some practical tips:

1. Stay within your limit: Treat your arranged overdraft as a hard ceiling. Going into an unarranged overdraft can trigger fees and damage your credit. If you’re close to the edge, speak to your bank about a temporary increase.
2. Use it short-term only: Overdrafts are best for emergencies or short-term gaps. If you’re always overdrawn, consider a cheaper alternative like a personal loan or 0% interest credit card.
3. Have a repayment plan: Aim to clear your overdraft on payday or gradually reduce it. Even small monthly repayments can help you get back in the black.
4. Monitor your balance: Use mobile banking or alerts to track your spending and avoid accidental overdraft use.
5. Know your account features: Some banks offer interest-free buffers. If you struggle with overspending, consider reducing or removing your overdraft limit.
6. Budget and build a buffer: A basic budget and small emergency fund can help you avoid relying on your overdraft altogether.

If you find yourself regularly relying on your overdraft, it might be time to explore other options that could be more cost-effective or better for your credit:

• Credit cards: Useful for short-term borrowing, especially with 0% interest offers. They also offer purchase protection and can help build your credit score (opens in a new tab) when used responsibly.
• Personal loans: Better suited for larger or longer-term borrowing. They offer fixed repayments and often lower interest rates than overdrafts.
• Budgeting and emergency savings: A simple budget and a small savings buffer can help you avoid overdrafts altogether.
• Credit unions: These community-based lenders often provide affordable small loans with fair terms.