Bank Overdraft

Bank overdraft

An overdraft is a form of credit on your current account. It allows you to withdraw money or pay bills from your bank account even if there is no money in there.

How does an overdraft work?

An overdraft is a credit facility that allows you to borrow more money than you have in your current account. Previously, there were two types of an overdraft, and these carried different interest rates and fees:

Bank Overdraft

Bank overdraft charges

Customers of high street banks could face annual overdraft charges as high as 49.9 per cent as a regulatory shake-up of borrowing costs delayed by Covid-19 finally comes into effect.

Does an overdraft improve your credit rating?

Yes. An overdraft can improve your credit rating as long as you use it sensibly. That means:

  • Staying well within your limit
  • Regularly paying off your overdraft
  • Not using an unauthorized overdraft

An arranged overdraft is unlikely to have a major impact on your credit score as long as you don’t go beyond your overdraft limit or have payments refused. In fact, if you use your overdraft sensibly and regularly pay it off it could improve your credit rating.

That’s because an overdraft will appear on your credit report as a debt. This means lenders will be able to see you have an overdraft, what your limit is and how much of your overdraft you are using. Holding the same current account for a number of years can also help your credit history mature, which can benefit credit scores.

If lenders can see that you stay within your agreed limit and regularly clear your overdraft, then it shows them you are a reliable borrower. This means you are more likely to be approved if you apply for another form of credit such as a credit card or mortgage.

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