Is it bad to live in your overdraft and can it hurt your credit record

Millions of current account holders end up in their overdraft most months. For some, it is a short term buffer for a few days before payday. For others, it has quietly turned into a long term debt that never seems to disappear.

Because overdrafts are attached to everyday bank accounts, it is easy to think of them as part of your normal balance rather than borrowing. But guidance from regulators and money advice services is clear: an overdraft is a form of credit, usually with interest rates that can rival or exceed many credit cards. Misusing it can be expensive and, over time, can harm your wider finances.

This guide breaks down how overdrafts work, whether “living in your overdraft” can damage your credit record, and what you can do if you are stuck in the red.

1. What an overdraft actually is

Money guidance services define an overdraft as a facility that lets you spend more money than you have in your current account, up to a limit set by your bank.

There are two main types:

• Arranged (authorised) overdraft – agreed in advance with the bank. You have a set limit and can borrow up to that amount.
• Unarranged (unauthorised) overdraft – happens when you spend more than your balance without an agreed limit, or go over your arranged limit.

MoneyHelper explains that an unarranged overdraft is usually more expensive and can trigger extra charges, though recent rule changes have cut some of the worst fees. Banks must now show the cost as a clear annual interest rate, so it is easier to compare.

In everyday language: an overdraft is borrowing from your bank. If you are regularly in your overdraft, you are effectively using a short term loan to cover day to day living costs.

2. How overdraft charges work after recent rule changes

Until a few years ago, overdraft charging structures were complicated and often unfair. Many banks used daily or monthly fees, far higher prices for unarranged overdrafts and multiple additional charges.

The financial regulator’s high cost credit review changed that. From 2020, banks:

• must price overdrafts using a single annual interest rate, rather than a mix of fees and rates
• are banned from charging more for unarranged overdrafts than arranged ones with the same provider
• are not allowed to levy most fixed daily or monthly borrowing fees.

A later update from the regulator reported that these reforms have saved customers nearly a billion pounds in total, mainly by cutting the cost of unarranged borrowing and prompting banks to help customers who overuse their overdraft.

However, the fact that the charging structure is simpler does not mean overdrafts are cheap. Many banks now quote a single overdraft rate that is significantly higher than typical personal loan rates. Used for a few days, this may be manageable; used for months at a time, it can add up quickly.

3. Does using your overdraft affect your credit record?

This is one of the most common misunderstandings.

Overdrafts and your credit file

Major credit reference agencies confirm that:

• Arranged overdrafts usually appear on your credit report as a form of credit linked to your current account.
• Lenders can often see your overdraft limit and your typical balance, not just whether you have an overdraft.
• Simply having an arranged overdraft is not usually a problem for your credit score on its own.

Guides from banks and comparison sites echo this: an arranged overdraft, used occasionally and repaid regularly, is unlikely to cause major damage.

When overdrafts can hurt your credit score

The way you manage your overdraft matters far more than whether one exists. Experian, MoneyHelper and other sources explain that your credit position can be affected when:

• you are often close to or beyond your limit – high utilisation can signal that you are struggling
• you go into an unarranged overdraft, causing payments to be refused or extra charges to be added
• your bank reports missed or late payments on associated products or closes your account because of persistent overdraft debt
• an overdraft is left unpaid and turned into a separate debt, which may then default and appear on your file.

Practical guides from banks themselves say much the same: managing an overdraft well (staying within the limit and paying it down regularly) is unlikely to have a big effect, but heavy, long term use or unarranged borrowing can drag your score down.

Some lenders and credit score tools have also begun to factor in overdraft behaviour more explicitly, rewarding people who reduce or stop overdraft use and viewing chronic reliance on overdrafts as a sign of financial strain.

4. What happens if you cannot clear your overdraft

If you are stuck in your overdraft and only paying interest each month, it can feel like you are on a treadmill.

Citizens Advice explains that if you do not respond to the bank about overdraft problems:

1. The bank can issue a default notice telling you to repay your overdraft or come to an arrangement.
2. If you do not pay or agree a plan within the timescale, the bank may close the account and demand repayment of the full overdraft.
3. If you still cannot pay, the bank can pass the debt to a collection agency or take court action. A County Court judgment (CCJ) can then appear on your credit file for up to six years.

Guides from debt advice services add that:

• bank debts such as overdrafts are generally treated as non priority debts, meaning you would not normally lose your home simply for not paying them
• however, they can still lead to court judgments, extra costs and serious credit damage if ignored.

In short: overdrafts may feel informal because they sit on your day to day account, but if problems are left to escalate, they are collected much like any other unsecured debt.

5. Is it “bad” to live in your overdraft?

Using an overdraft occasionally for a few days before payday is what many banks imagine when they design these products. The main problems arise when:

• you are in the overdraft for most or all of the month
• the balance is not reducing, or is slowly getting worse
• you are paying significant interest every month just to stand still
• you are using new borrowing (for example, credit cards or loans) just to get out of your overdraft temporarily.

MoneyHelper and debt charities warn that this pattern is a sign that an overdraft has stopped being a buffer and has turned into a long term debt. It can also mask deeper budget issues, such as rent, energy or food costs that are consistently higher than your income.

From a lender’s point of view, being permanently overdrawn can show up on your credit file as:

• a high proportion of your agreed limit in use most of the time
• a long standing debt that is not coming down
• in worse cases, a record of unarranged overdrafts and refused payments.

All of these can make it harder or more expensive to get other credit, even if you technically never miss a minimum payment on anything else.

6. Practical steps if you are stuck in your overdraft

If you are permanently in the red, there are several practical strategies drawn from money guidance sites and debt advice agencies.

Step 1: Stop treating the overdraft as part of your income

It helps to mentally separate your overdraft from your real spending money. Some people:

• open a basic or secondary account with no overdraft and have wages and benefits paid into that
• use the new account for wages and essential bills
• treat the old overdrawn account purely as a debt to be repaid, making a fixed monthly payment into it until the overdraft is cleared.

This can break the habit of “spending back to zero” each month.

Step 2: Talk to your bank early

Regulator guidance makes clear that banks are expected to support customers in financial difficulty, including those struggling with overdrafts.

Practical help can sometimes include:

• freezing or reducing interest for a period
• converting part of the overdraft to a fixed repayment plan or personal loan at a clearer rate
• cancelling or reducing the overdraft limit so you do not slide back into it.

Explain that you are in financial difficulty, ask what support options exist for overdraft customers and keep notes of all calls and letters.

Step 3: Make a realistic budget and prioritise

Citizens Advice recommends creating a budget that separates priority bills (housing, energy, council tax, essential travel) from non priority debts (credit cards, loans, overdrafts).

Once you know what you have left after essentials, you can:

• decide how much you can afford to put towards reducing the overdraft each month
• share the remainder proportionately between non priority debts, possibly using a formal plan if you have several creditors.

If you cannot afford to pay anything after priorities, or only a token amount, a debt advice charity can help you negotiate breathing space or temporary reduced payments.

Step 4: Avoid expensive “solutions” that make things worse

Be cautious about:

• taking out high interest loans just to clear an overdraft
• using credit cards cash advances to pay off the overdraft (these are usually very expensive)
• agreeing to products you do not fully understand, such as logbook loans or high cost short term credit.

These can often increase your overall costs and risk, even if they give temporary relief.

If you are considering consolidating debts, get impartial advice first and compare the total cost, not just the headline monthly payment.

7. How to use an overdraft safely in future

If you decide to keep an overdraft facility at all, these rules of thumb from banks and independent guides can help.

• Keep the limit modest – only as high as you might reasonably need for a short term cashflow gap.
• Aim to be in credit for part of each month – for example after payday. If you are never in credit, the overdraft is too large or your budget does not balance.
• Avoid unarranged overdrafts – set up alerts in your banking app and move money before payments are refused.
• Review your overdraft every year – if you have not used it for months, you might choose to reduce or remove it.

Remember that an overdraft is meant to be a safety net for unexpected timing bumps, not a permanent feature of your budget.

Key points to remember

• An overdraft is a type of borrowing. Arranged overdrafts are not automatically bad, but they are not free money.
• Recent rule changes have removed many of the worst overdraft fees and made costs clearer, but interest rates can still be high.
• Simply having an arranged overdraft is usually fine for your credit record, but heavy, long term use or unarranged borrowing can harm your score and make other credit harder to get.
• If you are stuck in your overdraft, treat it as a debt to be repaid, not as part of your income, and speak to your bank and a free debt advice service as early as possible.
• Do not ignore letters from your bank about overdraft problems – they can lead to account closure, collection action and in some cases a court judgment.
• Used sparingly and with a plan to get back into credit quickly, an overdraft can be a useful back up. Used as a long term crutch, it can quietly become one of the most expensive forms of borrowing in your life.

References (further reading)

• Financial Conduct Authority – High cost credit review and overdraft policy statements
• FCA press release on savings to consumers from overdraft rule changes
• MoneyHelper – “Overdrafts explained”
• Citizens Advice – “Bank overdrafts” and “Making a plan to pay your debts”
• Experian, NerdWallet and bank guidance on overdrafts and credit scores
• National debt advice charities’ information on dealing with overdraft debts