Overdrafts - Impact on Credit Score?


(marvin_luksenberg) #1

Hi Team Monzo,

I never had an overdraft formally set up on my Barclays Bank account but I did get a prompt to set one up with Monzo.

I’m curious to find out more about the impact that Monzo overdrafts would have on my credit score - both applying for the overdraft, and then using that facility thereafter.

Best,
Marvin


(Dan) #2

Ditto, I haven’t had the notification asking yet… however I would also like to know before getting one… as I intend too as a backup

Dan


(Allie) #3

One problem is you don’t have just one credit score… You’re scored by the lender. They may use a widely commercially available scoring model, but there is no way to know which one in advance.

An unused overdraft could be:

  • Ignored completely and not affect scoring.
  • Seen as a sign of financial stability since you haven’t touched it, and improve your score.
  • Seen as a risk (more available credit) and reduce your score.

Unfortunately there’s no way to know for sure how your lender’s scoring model will see it. Lenders use multiple score models and how it is seen could be affected by other factors on your report.


(marvin_luksenberg) #4

Thanks for the info. I’m looking for a general response though, and I’m more interested in the effects of actually using the overdraft as opposed to having one and leaving it untouched.

My assumption is that Monzo is happy for its customers to be using their overdraft as often as necessary and that it wouldn’t become an issue and affect creditworthiness unless it wasn’t paid back after an extensive amount of time… but it would be good to get clarity from someone at Monzo.

Though there’s something to be said about the very simple, clean UI, I think this is an important topic worth addressing directly in the app so it can potentially debunk any myths and make users less hesitant to use that particular product.


(Allie) #5

I think you might be slightly misunderstanding how credit scoring works. It doesn’t matter what makes Monzo, or anyone else, happy.

Reporters on your credit report simply report the facts. For example, that you’re using £500 of overdraft and paying as agreed. Or that you’re using that, but in default.

It is up to the potential lender scoring you to decide how to interpret these facts. No one at Monzo or on here can speculate exactly how these facts will be interpreted. Only the potential lender scoring you knows that for sure.

All anyone on here can comment is what is usually seen as positive and what is usually seen as negative.


#6

Not only do different lenders score different factors differently, even within a lender they will use a different scoring system for different products


#7

It will affect your credit rating for few months only. Do not apply for overdraft if you want to apply for a mortgage or credit card


(Allie) #8

That’s only the hard inquiry from the application itself. OP intends to use the overdraft (which could affect their score) and its availability could also matter a little bit.


#9

With all my debts I been offered £100 Monzo overdraft :slight_smile:


(Allie) #10

I haven’t been offered an overdraft at all, but all I can say is… wow. The APR on the maximum overdraft most people are allowed is crazy high.


(Chris) #12

I’ve been offered a £100 overdraft too and I winced at the same point (what the APR would be). Unlikely to apply for it and use it on that basis.

Not sure whether that’s a limit reflecting the fact the overdrafts are still in testing, or whether that’s an indication of how Monzo assess my creditworthiness alongside my current usage of the account (I’ve got a fair amount of credit available and unused, and sporadically use the current account). Time will tell, I guess…


(system) #13

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