Have you just checked your bank balance and found yourself in overdraft?
If you’re hoping to get a mortgage or loan soon, you might be wondering what this means for your credit score.
You’re not alone – with energy bills and food costs climbing, more people are using their overdrafts to help balance their monthly spending.
The good news is that using your overdraft doesn’t automatically harm your credit score.
What really matters is how you use it and manage it. Let’s look at exactly what happens when you use your overdraft and how you can protect your credit rating.
How overdrafts appear on your credit report
When you check your credit report through agencies like Experian, Equifax, or TransUnion, you’ll see information about your current account.
Your bank shares monthly updates about your overdraft arrangement and usage with these agencies.
An arranged overdraft appears as an agreed credit facility on your report, similar to how a credit card limit shows up.
If you’re using an arranged overdraft within its terms – staying under your limit and making payments as agreed – this actually shows lenders you can handle credit well.
But there’s a clear difference with unarranged overdrafts.
Going beyond your agreed limit or using an overdraft without prior agreement (unauthorised) sends up red flags on your credit file. This suggests to lenders you might be struggling with money management.
Many bank customers believe they should never go into debt or use their overdraft to maintain a good credit score.
That’s not true – using an arranged overdraft sensibly can help build your credit history. The key is staying within agreed limits and regularly returning to a positive balance.
Read more: Will Checking My Credit Report Affect My Credit Score?
What is a thin credit file and how does it affect mortgages?
A thin credit file means you have very little credit history – perhaps just a bank account and one credit card, or maybe no credit accounts at all.
This often affects young buyers, people who have always paid cash, or those who have recently moved to the UK.
Without enough credit history, lenders find it harder to assess whether you’ll make your mortgage payments reliably. They can’t see how you’ve handled credit in the past, which makes lending to you seem riskier from their perspective.
Most high street banks prefer to see at least three years of UK credit history before offering a mortgage. They want to see evidence that you can manage monthly payments and credit responsibly over time.
But having a thin credit file doesn’t mean you can’t get a mortgage.
Some lenders look at other factors like rent payment history, savings records, or professional qualifications. You might need a larger deposit, or you may need to spend some time building your credit history first.
Building credit history is straightforward but takes time. Opening a UK bank account, getting on the electoral roll, and using a credit card responsibly for everyday spending all help create a credit history.
Your mortgage broker will be able to assess your credit report and make some suggestions.
When overdrafts affect your credit score
Your use of an overdraft over time creates patterns that can influence your credit score.
For example, if you use £200 of your arranged overdraft for a few days before payday and then clear it when paid, most lenders see this as normal account management.
However, if you’re constantly using most of your overdraft limit or frequently going over it, this affects your score differently.
Let’s say you have a £2,000 overdraft and you’re regularly sitting at £1,800 overdrawn – this pattern might suggest to lenders that you’re overcommitted and relying too heavily on borrowed money.
Missing payments while overdrawn creates additional problems.
If your account has insufficient funds for a direct debit, both the overdraft position and the missed payment appear on your credit file. Several bounced payments in a short period can significantly impact your score, with effects lasting up to six years.
Read more: Boost your credit score
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Understanding different types of overdrafts
Banks offer several types of overdraft arrangements, each affecting your credit situation differently.
Standard arranged overdrafts come with a formal agreement outlining your limit and charges. Major banks like Barclays, HSBC, and NatWest offer these with current accounts.
Banks like Santander and Halifax offer interest-free overdrafts up to £1,500 or more for students. Using these responsibly during university years won’t harm your long-term credit score, but you’ll need a plan for managing the overdraft after graduation when interest kicks in.
Business current account overdrafts work differently.
While primarily affecting your business credit profile, they can impact your personal credit score if you’ve given personal guarantees. For sole traders, the line between business and personal credit often blurs, making professional advice particularly valuable.
Related reading: Does a student loan affect your mortgage?
How lenders view your overdraft use
When you apply for a mortgage, lenders take a detailed look at your bank statements, usually reviewing the last 3-6 months of account activity.
They’re particularly interested in how often you use your overdraft and whether you regularly get back into credit. For example, if you’re applying for a £400,000 mortgage but consistently rely on a £2,000 overdraft, lenders might question your ability to manage monthly payments of £2,000-£3,000.
A limited amount of overdraft information can be viewed on your credit report, but by asking for bank statements, lenders can look at your day to day spending patterns.
High street banks like Halifax and Nationwide will view occasional arranged overdraft use as acceptable, provided you demonstrate good account management overall.
However, if your statements show increasing overdraft use or regular unarranged borrowing, this could affect how much they’re willing to lend.
Credit card and personal loan providers look closely at overdraft patterns from the past year. They’re checking whether your need for overdraft borrowing is growing, which might indicate financial stress.
For instance, if you started the year occasionally using £100 of your overdraft but now regularly use £1,000, this trend raises concerns.
The Exception
How a lender looks at your overdraft usage would be different if you applied for a debt consolidation loan, that was used to repay the overdraft.
You will need to demonstrate that the new loan repayments are affordable. This should work in your favour as the loan or mortgage will be setup over a number of years, making the repayments more manageable.
Read more: What does debt consolidation mean?
Managing your overdraft responsibly
Setting up balance alerts through your banking app gives you early warning before going into overdraft.
Most banks now send notifications when your balance drops below a certain point – you might set alerts for £100 above your overdraft limit, giving you time to transfer money or adjust spending.
Looking at when your regular payments leave your account can make a big difference.
Moving direct debits for bills like council tax or utilities to just after your salary arrives often reduces overdraft use. Some people find splitting larger payments helps too – many utility companies now offer this option without extra charges.
Building a financial buffer helps prevent unexpected costs from pushing you into overdraft.
Starting with small, regular savings – even £50 a month – adds up quickly. Some people save their bank account cashback or switch energy suppliers to free up extra money for their buffer fund.
If you find yourself using your overdraft more than you’d like, your bank might have better account options.
For example, Santander and Nationwide offer accounts with lower overdraft charges or different fee structures that could save you money while you work on reducing overdraft use.
Getting help with overdraft concerns
Starting a conversation with your bank about overdraft concerns often reveals helpful options you didn’t know about.
Banks prefer helping customers stay on track rather than dealing with serious financial difficulties later. They might suggest switching to an account with lower fees or setting up a repayment plan to gradually reduce your overdraft.
Free debt advice services like StepChange and Citizens Advice understand how overdrafts fit into your wider financial picture.
They help thousands of people each year create practical plans to reduce overdraft use. Their advisers can explain your rights and suggest ways to improve your situation that you might not have considered.
Mortgage Advice
If you’re planning a mortgage application, speaking with an independent mortgage broker helps you understand how different lenders view overdraft use.
They know which lenders take a more flexible approach and can help you prepare your application to address any concerns about your overdraft history.
Try to speak to a broker at least six months before needing a new mortgage. This gives them time to analyse your situation and for any suggested actions to take effect.
Read more: Why should you use a mortgage broker?
Moving forward
Understanding how overdrafts affect your credit score helps you make better financial choices.
While overdrafts can impact your credit rating, careful management prevents most negative effects. Regular account monitoring, proper use of bank alerts, and building a cash buffer all contribute to maintaining a healthy credit score.
If you’re planning to apply for a mortgage or loan, getting professional advice early gives you time to improve your position with lenders.
A broker can explain exactly what steps will strengthen your application and which lenders best suit your circumstances.
Frequently Asked Questions
Going slightly overdrawn within your arranged overdraft limit doesn’t automatically harm your credit score. What matters is how you manage it – if you regularly return to credit and stay within your agreed limit, this shows good account management.
Information about your overdraft usage remains on your credit file for six years. However, recent account activity (last 3-6 months) carries more weight with lenders than historical data.
Yes, you can get a mortgage while using an arranged overdraft. However, lenders will look at how much of your overdraft you use and how often. Regular use of a large portion of your overdraft might affect how much you can borrow.
Yes, all UK banks report your current account activity, including overdraft use, to credit reference agencies like Experian, Equifax, and TransUnion. This reporting happens monthly.
Read more: What is a Credit Reference Agency?
Not necessarily. Having an arranged overdraft and using it responsibly can actually help your credit score. It shows lenders you can manage credit facilities well.
Related reading: Will Checking My Credit Report Affect My Credit Score?
No, switching banks won’t hide previous overdraft history. Your credit file maintains records from all bank accounts for six years.
Any formal change to your overdraft limit may show on your credit file. Decreasing your limit usually has minimal impact, while increases might require credit checks.
That said, if your credit limit is very high, and your usage very low, it would be prudent to ask for the limit to be reduced.
Having an unused or rarely used arranged overdraft generally doesn’t negatively affect mortgage applications. Some lenders view it positively as a safety net you manage well.
So, there’s two distinct situations here:
1 – After you have applied for a mortgage but before it has started: Do not apply for any new credit or attempt to change any credit limits.
2 – After your new mortgage has actually started: It would be OK to apply for an overdraft but your chances would probably improve if you left it for a few months.
Read more: Pre-completion credit checks explained
