When it comes to borrowing money, most people think about personal loans, credit cards, or home loans. But have you ever heard of overdraft loans? These loans are flexible, fast, and especially helpful for people running a business or those who want short-term funds without going deep into debt.

But did you know that an overdraft loan can also improve your credit score? Yes, you read that right. Let’s understand how this works in simple words and see why more and more people, especially small business owners, are using this smart option.

What is an Overdraft Loan?

Before we get into how it helps your credit score, let’s understand the basics. An overdraft loan is a type of credit facility that banks offer to account holders. It allows you to withdraw more money than you have in your overdraft account. The bank sets a limit based on your account history, income, or business turnover.

Let’s say you have ₹50,000 in your account but you need ₹70,000 urgently. With an overdraft facility, you can withdraw the extra ₹20,000 and repay it later with interest. It’s like a loan, but more flexible.

Types of Overdrafts

There are mainly two types:

1. Personal Overdraft – Usually linked to your savings or salary account.
2. Business Overdraft – Designed for small businesses or self-employed people who may face seasonal ups and downs in cash flow.
   

A business overdraft loan can be a big help when your payments are stuck or you need working capital fast.

How Overdraft Loans Help Improve Your Credit Score

Now, let’s come to the main part, your credit score. This score tells banks how trustworthy you are when it comes to paying back loans. A higher credit score means better chances of getting loans in the future.

Here’s how an overdraft facility can boost your credit score:

1. Shows Responsible Credit Usage: Using an overdraft limit smartly shows that you can handle credit well. If you borrow only what you need and repay on time, your credit behaviour looks positive to lenders.

2. Helps Maintain Credit Mix: Credit bureaus like when you have a healthy mix of different types of loans, secured, unsecured, long-term, and short-term. An overdraft loan adds variety to your credit profile, making it stronger.

3. Avoids Missed Payments: If you are short on funds and about to miss an EMI or bill payment, an instant overdraft loan can help cover it. Timely payments help maintain and even improve your credit score.

4. Low Utilisation Ratio: Using a small portion of your overdraft limit and repaying regularly keeps your credit utilisation low, a major factor in credit scoring. If you get a ₹1,00,000 overdraft and use only ₹30,000, that’s a healthy sign for your credit report.

5. Keeps Credit History Active: An active overdraft account, even if not used often, keeps your credit report updated and shows ongoing credit management.

Read More: Understanding Aadhaar Loan in India: A Simple Guide

Example: Overdraft in Real Life

Let’s say Rohit runs a small printing business. His clients sometimes delay payments. But he still has to pay salaries, rent, and suppliers on time. So, Rohit decides to apply for an overdraft. His bank approves a ₹2 lakh limit on his current account.

Now, whenever Rohit faces a short-term cash crunch, he dips into this limit, uses the funds, and repays once his clients pay him. By doing this regularly and repaying on time, Rohit’s credit score improves. The next time he applies for a business loan, banks offer him better interest rates and higher limits.

Benefits of Overdraft Loans

Here are some more reasons why people like overdrafts:

• Quick access to funds
• Pay interest only on used amount
• Flexible repayment
• No fixed EMI
• Great for urgent cash needs
  

With the rise of digital banking, many banks now offer instant overdraft loan approvals online. So, if you are eligible, you can apply for overdraft in just a few minutes through your banking app.

Tips to Use Overdraft Wisely

To make sure your overdraft actually helps your credit score, keep these tips in mind:

1. Don’t use the full limit all the time – Use only what you need.
2. Repay on time – This is the most important.
3. Track interest charges – Since interest is charged daily, avoid keeping a balance for too long.
4. Avoid frequent defaults – Missing repayments can hurt your credit score instead of improving it.
   

Who Should Use Overdraft Loans?

Overdrafts are not for everyone, but they are very useful for:

• Small business owners
• Freelancers and consultants
• Self-employed professionals
• People with irregular income
• Businesses with seasonal cash flow
  

If you fall into any of these groups, consider applying for a business overdraft rather than a regular loan. It gives you freedom without long-term debt. The best you can choose is BigMudra for applying for an overdraft loan without going anywhere, it’s instant, easy, and no paperwork required. 

Final Thoughts

An overdraft loan is more than just a safety net. If used wisely, it can help you stay financially stable, manage urgent needs, and most importantly, improve your credit score.

It gives you control without the burden of fixed EMIs, and shows banks that you’re a responsible borrower. Whether you are looking for a business overdraft loan or a simple overdraft facility linked to your account, it’s worth exploring.

So next time you are in a tight spot or want to improve your credit score, don’t just think about credit cards or personal loans. An overdraft account might be the smarter and more flexible choice.

Pro Tip: Before you apply for overdraft, compare interest rates and terms offered by different banks. You can compare loans and interest rates easily on BigMudra from various banks and NBFCs and choose a plan that matches your income pattern and repayment capacity.