Does overdraft affect credit score? If you want to do something with a bank or credit, think carefully about how it will affect or hurt your credit history and score. One of them is overdraft. So, what exactly is it, and how does it affect your credit? Hanfincal will provide you with the information you require on this subject. Let’s jump right in.
1. What is an overdraft?
An overdraft is a line of credit that covers your transactions if the balance in your bank account falls below zero. In other words, it occurs when there is insufficient money in an account to cover a transaction or withdrawal, but the bank still allows the transaction.
For example, if you have $100 in your account and a bill for $120 is sent to you, you will incur a $20 overdraft.
In this case, you spend the bank’s money rather than your own, and you usually have to pay interest for the privilege. Moreover, there is typically a fee for each overdraft. Many banks can charge an overdraft fee of up to $35.
Typically, you will agree on an overdraft limit with your bank or lender – this is referred to as an arranged overdraft.
2. Does Overdraft Affect Credit Score?
Overdrafts do not directly affect your credit score if you don’t go over your overdraft limit or refuse payments. If you use your overdraft wisely and pay it off regularly, you may be able to improve your credit rating.
However, if you don’t manage your overdraft correctly, it can hurt your credit score. For example, if you consistently exceed your overdraft limit, it will harm your credit rating. This indicates to lenders that you may be experiencing financial difficulties.
Lenders also consider your overall unsecured (non-mortgage) borrowing level, so any overdraft debt you have is likely to be considered in credit scores and lending decisions.
3. How do overdrafts affect your credit score?
Here are some of the ways an overdraft can harm your credit score:
- Credit mix: Having various account types, such as credit cards and loans, demonstrates your history with different kinds of debt and can help your credit score.
- Hard inquiries: When you apply for credit, and a lender checks your credit report, this is referred to as a hard inquiry. These inquiries can lower your credit score, particularly if you have a large number of them in a short time.
- Negative information: Charge-offs, foreclosures, bankruptcies, and debts in collections can all hurt your credit score.
- Missed payment history: When you habit of skipping your overdraft payments at the end of the month, or if you only repay the minimum amount due.
- High credit utilization: If you max out your overdraft, the credit bureaus will lower your credit rating because it shows high credit utilization. Keep your credit utilization ratio low, at least 30% of your available credit to improve your credit score.
- High interest: If you use unarranged overdrafts, you may be required to pay high interest to banks, leading to a debt cycle. You are at increased risk of becoming a defaulter if you have excessive due credit.
4. Another way to improve your credit score
There are numerous ways to raise your credit score, both short-term and long-term. In addition to using traditional methods such as paying bills on time, using credit lines that do not exceed 30% of your available credit, and limiting the number of credit cards you open at one time, you can use an online center to get your credit score for free. Credit monitoring is one of them. If you’re interested, don’t miss out on the opportunity to boost your score in less than a second.
5. How to get rid of an overdraft?
- Spend less money: A budget allows you to see where your money is going each month and where you can cut back.
- Make a repayment plan for yourself: Set a goal for how much you want to pay off every month and treat it like any other bill. Include it in your budget so that the money is accounted for and you aren’t tempted to spend it elsewhere.
- Examine your other borrowing options: Personal loans have a lower interest rate than an overdraft. If you don’t think you’ll be able to repay your overdraft shortly, you might want to consider taking out a personal loan to do so. A credit card for money transfers with no interest for a set period is another option. This credit card allows you to deposit funds into your bank account, which you can use to cover an overdraft. You will then be able to repay your debt without incurring overdraft interest.
- Reduce your overdraft protection: As you work your way out of the overdraft, you may want to reduce your overdraft limit to help you resist temptation. This may help you avoid re-entering the market once your debt has been paid off.
6. Overdraft affects credit score FAQs
6.1. Does a student overdraft affect credit score?
Student overdrafts typically have no effect on your credit score. This is because an overdraft is a component of your current account that credit bureaus are uninterested in. They are far more concerned with your credit history and how you handle borrowed funds.
6.2. Does increasing your overdraft affect your credit rating?
Yes, your credit score may drop a few points for a few months due to this. Using more of your overdraft will increase your total debts and lead to a rise in your credit rating.
6.3. Does paying off an overdraft improve your credit rating?
Absolutely yes. As long as you don’t overspend your overdraft limit or have payments refused, an arranged overdraft is not to have a big impact on your credit score. In fact, if you use your overdraft wisely and pay it off regularly, you may be able to improve your credit rating.
6.4. Does having an overdraft affect the chance of getting a mortgage?
Yes, maybe. Being in an overdraft can hurt your chances of getting a mortgage, but this isn’t always the case. Whether or not a mortgage lender will decline your application or penalize you for this will depend on the circumstances surrounding your overdraft, such as:
- your unauthorized overdrafts or not,
- whether or not you use your overdraft responsibly,
- how reliant you are on your overdraft,
- how large of your overdraft.
6.5. Does reducing your overdraft affect your credit rating?
In general, lowering your overdraft can have an impact on your credit rating. The less you borrow, the better. Lenders would also prefer to see a trend toward less borrowing rather than more borrowing.
6.6. Does being overdrawn affect your credit rating?
Borrowing has an impact on your credit rating because your credit report totals all of your unsecured loans. This includes overdrafts and debts such as credit card balances and personal loans.
There are two situations in that overdraft can affect your credit rating:
- Excellent borrowing: If you stay within your agreed-upon overdraft limit, keep the amount low, and don’t have any payments refused, your credit score will improve.
- Inappropriate borrowing: In contrast, going over your overdraft limit, using an unauthorized overdraft regularly, or having cheques or direct debits refused can all harm your credit rating.
Hanfincal believes you know the answer to the following question: Does overdraft affect your credit score? In some cases, you can comply with the payment deadlines and pay off your overdraft as soon as possible, which helps you improve your credit. Overdraft, on the other hand, has a negative impact. Therefore, bear in mind that you should have a thorough understanding of all pertinent information before you begin.
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