Expert weighs in on overdraft's impact on credit scores

27 January 2024 , 07:00

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Being in your overdraft can impact your credit score (Image: Getty Images/iStockphoto)

January can be hard month if you're struggling financially after Christmas.

Over half of people (52%) said this is the month where you feel the most money stress, while 84% said this January might be their toughest yet, according to Nationwide Building Society. Many people will have been forced to use their overdrafts to get by until payday - but does this have an affect on your credit score?

An overdraft lets you borrow money through your current account, so it’s a form of debt as it needs to be repaid. You go into your overdraft when a transaction is authorised but there isn’t enough money in your account. There are two different types of overdrafts.

An authorised overdraft is where you've agreed a limit with your bank and can spend money up to that threshold. An unauthorised overdraft is where you don’t have an arrange limit and you’ve spent more than you have in your bank account, or if you’ve gone over your agreed limit.

Both come with charges and interest, with the typical interest rate ranging from 19% to 40% or more, according to MoneyHelper. They are generally an expensive form of debt, so it is always best to get out of your overdraft as quickly as possible.

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Does being in my overdraft affect my credit score?

Just having an overdraft is unlikely to affect your credit score, but the way you use and manage it can have an impact - in a good or bad way. James Jones, Head of Consumer Affairs at Experian, explained if you often fail to pay off your overdraft, then this could have a negative affect on your credit score.

Going over your agreed limit regularly may also suggest to lenders that you're not in control of your finances. But if you use it sensibly by paying it off regularly, thereby showing you're a responsible borrower, then it could actually improve your credit rating. James told The Mirror: "Overdrafts are a credit product and, as a result, will usually be factored into credit scores.

"Any negative impact of using an overdraft facility is likely to be minimal if you stay within your agreed limit and avoid attempting payments when insufficient funds are available. Stray above your limit or cause a cheque or direct debit to ‘bounce’ and you should expect the bank to register negative markers on your credit report, triggering a score reduction.

"Running a current account responsibly can make a positive contribution to credit scores, but bear in mind that any overdraft balance will be totted up with borrowing on your other accounts, such as cards and loans, and factored into creditworthiness assessments. So always make sure your borrowing is affordable and you have a plan to pay it back."

Levi Winchester