Does an Overdraft Effect My Credit Score?

What is an overdraft?

An overdraft is a type of credit that gives you the ability to withdraw more money than you have in your current account. Since this is a type of credit, it will appear on your credit report as debt, but that may not necessarily be a bad thing: it depends if you’ve made an authorised or unauthorised overdraft.

What are authorised and unauthorised overdrafts?

An authorised overdraft is one that you have applied for with your bank and have been approved. The bank will set a spending limit on the overdraft and will usually charge interest on any spending.

An unauthorised overdraft is one you have not applied for, but the bank is willing to let you take out money even when you have no available funds to provide you with more flexibility. This type is typically more expensive than authorized.

Does an overdraft effect my credit score?

Authorised overdrafts will likely not have a significant impact on your credit score if you stay within the pre-agreed overdraft limit. They could even help your credit score if you consistently pay off your overdraft, which indicates to your bank that you are a reliable borrower.

However, unauthorised overdrafts, including going over your pre-agreed overdraft limit, may negatively affect your credit score.

What homebuyers need to know:

  • When banks and building societies are determining your eligibility for a mortgage, they will review your overdraft history. If you have unauthorized overdrafts or go over your authorized overdraft limit, this activity could negatively affect your credit score and could affect your ability to qualify for a mortgage.
  • Having an overdraft isn’t necessarily bad, but homebuyers must be careful. Consistently overdrafting your current account or going over your authorized overdraft limit will negatively affect your credit score.
  • Consistently paying off your authorized overdraft could help your credit score.

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OnLadder is the trading name of OnLadder Loans Ltd, a company registered in England and Wales under registration number 13642073. Our registered office is Kemp House, 160 City Road, London EC1V 2NX. OnLadder Loans Ltd. is a subsidiary of OnLadder Ltd., registered in England and Wales under registration number 12677436. OnLadder Ltd's registered office address is 71-75 Shelton Street, London, England, WC2H 9JQ.

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