How a Student Overdraft May Affect Your Credit Score

While a student overdraft itself doesn't appear on your credit report, mishandling it can trigger a chain of events that negatively impacts your credit score. Here’s how that can happen.

1. Exceeding Your Limit: Consistently going over your arranged overdraft limit or failing to bring your balance back within it can lead to the bank taking action to recover the funds.
2. Default Notice: If you fail to repay the overdrawn amount after repeated requests from the bank, they may issue a notice of default, which is recorded on your credit file for six years.
3. Debt Collection: The bank could pass your debt to a collection agency. This escalation is a serious step and can be a precursor to legal action.
4. Legal Action: In severe cases, the bank might take you to court to recover the money, potentially resulting in a County Court Judgement (CCJ) against you, a major red flag for lenders.
5. Credit Score Damage: A default or CCJ on your credit report will significantly lower your score, making it much harder and more expensive to get credit, from phone contracts to mortgages, in the future.

How Much Will a Student Overdraft Affect Your Credit Score?

The extent to which a student overdraft affects your credit score depends on a few variables. Here are the primary factors to keep in mind:

• Direct vs. Indirect Impact. A standard student overdraft won't appear on your credit file. The negative impact comes if the unpaid debt is passed to a collection agency for recovery.
• Credit Agency Calculations. Each credit reference agency uses a different algorithm to calculate scores. The severity of the impact can vary depending on which agency a lender uses to check your history.

How You Can Avoid a Student Overdraft Affecting Your Credit Score

Stay Within Your Arranged Limit

The simplest way to protect your score is to stay within your arranged overdraft limit. Exceeding this can result in fees and negative marks on your credit file. Regularly check your balance through your banking app to avoid accidentally going over your agreed amount.

Communicate With Your Bank

If you foresee financial difficulty, proactively contact your bank. They may be able to offer a temporary increase to your arranged limit. This prevents you from entering an unarranged overdraft, which is more likely to be reported to credit reference agencies and harm your score.

Ways to Improve Your Credit Score

Improving your credit score is entirely achievable through consistent, positive financial behavior. According to a guide from Kudos, most people can see meaningful changes within three to six months by taking a few strategic steps.

• Set up automatic bill payments. Your payment history is the most significant factor in your score, so ensuring bills are paid on time is the most important step you can take.
• Reduce your credit utilization ratio. Aim to use less than 30% of your available credit, as a lower ratio signals to lenders that you are not overextended.
• Monitor your credit reports. Regularly check your free credit reports from all three major bureaus to identify and dispute any errors or fraudulent activity that could be hurting your score.
• Become an authorized user. Being added to a credit card account with a long history of on-time payments and low utilization can help improve your own credit profile.
• Limit hard inquiries. Avoid applying for too much new credit at once, as multiple hard inquiries in a short period can temporarily lower your score.
• Diversify your credit mix. Having a variety of credit types, such as revolving credit and installment loans, shows lenders you can responsibly manage different forms of debt.

The Bottom Line

A student overdraft is a form of debt, so how you manage it matters. Staying within your agreed limit can positively impact your credit score, while mismanagement will have a negative effect.

Frequently Asked Questions

Will using my student overdraft lower my credit score?

Not necessarily. Using your arranged overdraft responsibly and staying within your limit won't harm your score. It can actually show lenders you manage credit well.

What happens if I go over my arranged overdraft limit?

Exceeding your limit can negatively impact your credit score. Lenders view this as poor financial management, and you may also face fees and higher interest charges.

Does closing a student bank account affect my credit score?

Closing an old account can slightly lower your score. It reduces your average account age and total available credit, which are factors in your credit history.