The good news is that using an authorised overdraft sensibly won’t harm your credit score, but it will be on your credit report and visible to lenders.
How do overdrafts work?
An overdraft is an ongoing line of credit that’s typically offered with a current account. When you use one, you’ll normally pay interest or fees for the privilege.
Banks and building societies tend to offer overdrafts of anywhere from £50 to £3,000, depending on your circumstances. The rate of interest that you pay can also vary dramatically from product to product. If you’re a student you might be lucky enough to have a 0% overdraft facility. Otherwise, if you bank with one of the larger, high-street banks and don’t always keep an eye on what they’re charging you, you could be shocked to find out that you’re paying a hefty daily fee each time you dip into your overdraft.
Overdrafts can be useful. If, for some reason, you have higher than normal outgoings, or some unexpected payments to make, it’s good to know that there’s a buffer in place. Millions of people use their overdraft every month and go back into the black when they are paid.
Your overdraft balance will show up on your credit file – if you use it you’ll be able to see the balance the last time your file was updated – and it counts towards the overall amount of credit available to you. That’s because of something called your credit utilisation ratio, sometimes called your debt-to-credit-limit ratio. This is how much you owe, compared with the total of the credit that’s available to you. In terms of your credit report, it’s a good idea to keep your credit utilisation ratio at reasonable levels at all times (say, 30% or lower). If it’s constantly high, this can hurt your credit score and give an impression of financial difficulty to would-be lenders.
If you are routinely in “unauthorised” overdraft territory, this is taken as a sign that you are struggling to budget and might have difficulty repaying credit. This could reduce the amount providers are willing to extend on credit cards, personal loans or other types of finance. Plus it’s not the best idea for you, as the further into your overdraft you go, the more interest you’ll be charged – and possibly the more fees you will incur, too, making it even harder to get out of overdraft dependency.
If you are completely unable to repay your overdraft, it’s possible that you will be referred to a debt collection agency, which would affect your score.
It’s certainly not all bad news, however. If, like most of us, you do regularly go into your overdraft and repay it monthly, this shows you are managing credit responsibly, and this can benefit your credit score.
Overdraft dos and don’ts
Do:
Pay off your overdraft monthly
Budget to minimise how much you use it – it’s all to easy to see it as your money
It’s a good idea to avoid overdraft use for many reasons, but your credit score isn’t one of them. As long as you repay any overdraft you use every month and can do so easily, credit providers won’t mind you dipping in to it.
Warning lights only flash if you can’t repay your overdraft borrowings, are repeatedly going into your unauthorised overdraft, or are just stuck at or near your limit.
Read about how different factors can affect your score
We show offers we can track - that's not every product on the market...yet. Unless we've said otherwise, products are in no particular order. The terms "best", "top", "cheap" (and variations of these) aren't ratings, though we always explain what's great about a product when we highlight it. This is subject to our terms of use. When you make major financial decisions, consider getting independent financial advice. Always consider your own circumstances when you compare products so you get what's right for you. Most of the data in Finder's comparison tables has the source: Moneyfacts Group PLC. In other cases, Finder has sourced data directly from providers.
Chris Lilly is Head of publishing at finder.com. He's a specialist in personal finance, from day-to-day banking to investing to borrowing, and is passionate about helping UK consumers make informed decisions about their money. In his spare time Chris likes forcing his kids to exercise more. See full bio
Chris's expertise
Chris has written 601 Finder guides across topics including:
Learn the facts about loan applications and your credit score plus what you can do to minimise the impact.
How likely would you be to recommend Finder to a friend or colleague?
0
1
2
3
4
5
6
7
8
9
10
Very UnlikelyExtremely Likely
Required
Thank you for your feedback.
Our goal is to create the best possible product, and your thoughts, ideas and suggestions play a major role in helping us identify opportunities to improve.
Advertiser disclosure
Finder.com is an independent comparison platform and information service that aims to provide you with the tools you need to make better decisions. While we are independent, the offers that appear on this site are from companies from which Finder receives compensation. We may receive compensation from our partners for placement of their products or services. We may also receive compensation if you click on certain links posted on our site. While compensation arrangements may affect the order, position or placement of product information, it doesn't influence our assessment of those products. Please don't interpret the order in which products appear on our Site as any endorsement or recommendation from us. Finder compares a wide range of products, providers and services but we don't provide information on all available products, providers or services. Please appreciate that there may be other options available to you than the products, providers or services covered by our service.
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
