Understanding Your Overdraft and Credit Scores In The UK
Understanding your overdraft and how this may affect your standing
Your creditworthiness can be calculated using your credit history, the diversity in the credit you have already taken out and even on your existing credit limits. There are additional factors that can have an impact, including your overdraft.
Many modern bank accounts have an overdraft feature and this is a dedicated amount that an account holder is able to borrow over their actual funds in an emergency. If you go into your overdraft, the sum will automatically be taken out once you have enough cash to cover it (if this isn’t pre-arranged, you will have to pay a fee). As a result, many individuals don’t realise that it is essentially a type of loan and can be included on credit reports. What this means is that your overdraft can affect your credit score.
Best practices for using an overdraft to improve credit
The good news is that using your overdraft doesn’t have to be a bad thing – but you will have to use it wisely. For example, it can be a wise move to arrange a small overdraft, use it (without going over the limit) and pay it off regularly (within the agreed parameters) to show that you are responsible. Remember that if you don’t pay it on time or do go over the limit, this will negatively affect your score.
It is important to note that you should only ever use an authorised overdraft to improve your credit score, as an unauthorised overdraft (when you go overdrawn) is considered bad for your credit, as it shows credit report agencies and potential lenders that you aren’t managing your finances properly.