An overdraft is when your bank account balance goes below zero. Usually you will agree an overdraft with your bank in advance up to a specific limit.
An overdraft is a form of credit, which means that any money you use from your overdraft is money you owe to the bank. When you use an overdraft, this can incur an interest charge or fee from your bank.
An overdraft may be offered to you as part of opening a bank account or you may need to apply for one from your bank account provider. The amount of your overdraft will depend on your personal circumstances, including credit score, income and outgoings. Usually there is no charge to arrange an overdraft. You will likely incur fees when you use your overdraft.
It's important to check your latest credit score before taking steps to improve it. Make sure that all the information on the report is accurate, and get it corrected by contacting the lender or credit reference agency if it isn't. TotallyMoney can provide you with a credit score and report, free, forever. Use them to track your finances and to find lenders most likely to accept you for credit.
There are two types of overdraft: arranged and unarranged:
If you think you’re going to go slightly overdrawn for a short period of time, check with your bank whether they offer an interest-free buffer zone.
Overdraft fees consist of:
In some cases, banks will allow you to go into an authorised or arranged overdraft up to a set limit interest-free. You must check with your bank if your account has this facility.
Unarranged overdrafts will have the same fee structure, but the rates are often significantly higher. In addition, you may also be charged paid item fees for any withdrawals, direct debits and other payments made from your bank account.
The fees and charges for overdrafts are changing from April 2020. This follows a new set of rules from the Financial Conduct Authority (FCA).
The FCA announced changes to how overdrafts are priced and offered to the public in June 2019. It immediately made banks and building societies ensure that any refused payment fees would correspond to the actual costs of refusing payments. The remaining changes come into force on 6 April 2020 and include:
From April 2020, overdrafts will only come with an interest rate charge – all fixed charges will stop. Overdrafts are a form of borrowing from your bank or building society, so it's important to compare the EAR interest rate as well as the advertised APR (coming April 2020) before you choose a current account. They are open-ended so don’t have a specific end date when the debt must be repaid.
Banks and building societies are still preparing their new overdraft charges ready for April, but some have already either announced or launched their new pricing. The table below shows some of the accounts that have confirmed pricing under the new regulations and the difference in cost for an overdraft under the current and future pricing.
|Provider||Account/Option Name||Old unarranged overdraft charges||New unarranged overdraft charges|
|Interest rate (EAR)||Usage fee||Cap||Total cost for £50 over 7 days||Total cost for £500 over 30 days||effective from date||Interest Rate (EAR)||Cap||Total cost for £50 over 7 days||Total cost for £500 over 30 days|
|Barclays Bank||Bank Account||0.00%||£0.00||£0.00||£0.00||22/03/2020||0.00%||£0.00||£0.00|
|first direct||1st Account||0.00%||£5.00||per day||£80||£35.00||£80.00||14/03/2020||39.90%||£20.00||£0.33||£13.99|
|Halifax||Reward Current Account||0.00%||£0.00||£0.00||£0.00|
|HSBC||Bank Account||0.00%||£5.00||per day||£80||£35.00||£80.00||14/03/2020||39.90%||£20.00||£0.33||£13.99|
|Lloyds Bank / Bank of Scotland||Classic||0.00%||£0.00||£0.00||£0.00|
|M&S Bank||M&S Current Account||0.00%||£0.00||£0.00||£0.00||14/03/2020||N/A||N/A||N/A|
|Metro Bank||Current Account||15.00%||£0.00||£60||£0.13||£5.78|
|Monzo Bank||Monzo Current Account||0.00%||£0.50||per day||£15.50||£3.50||£15.00||01/04/2020||19.00%||£0.17||£7.20|
|Nationwide BS||FlexAccount||18.90%||£0.00||per day||£50||£0.17||£7.17||11/11/2019||0.00%||£0.00||£0.00|
|Nationwide BS||FlexDirect||0.00%||£5.00||per day||£50||£35.00||£50.00||11/11/2019||0.00%||£0.00||£0.00|
|NatWest / Royal Bank of Scotland||Select Account||0.00%||£8.00||per day||£80||£56.00||£80.00||02/04/2020||39.49%||£20.00||£0.32||£13.87|
|Santander||123 Current Account||0.00%||£0.00||£0.00||£0.00||06/04/2020||0.00%||£0.00||£0.00|
|smile||Current||18.90%||£10.00||per day + £10pm||£60||£60.00||£60.00||04/04/2020||35.90%||£60.00||£0.30||£12.77|
|Starling Bank||Current Account||15.00%||£0.00||£2||£0.13||£2.00||01/04/2020||15.00%||£2.00||£0.13||£2.00|
|The Co-operative Bank||Current Account||18.90%||£10.00||per day + £10pm||£60||£60.00||£60.00||04/04/2020||25.90%||£60.00||£0.22||£9.56|
|TSB||Classic Plus||19.84%||£10.00||per day + £6 pm||£80||£76.17||£80.00||02/04/2020||39.90%||£30.00||£0.33||£13.99|
|Virgin Money / Clydesdale Bank / Yorkshire Bank||Virgin Money Current Account^||0.00%||£6.00||per day||£100.00||£42.00||£100.00||12/12/2019||19.90%||£0.18||£7.52|
^Old overdraft charges based on B Current Account which was withdrawn from sale on 29th November 2019
Some banks and building societies will offer a small interest-free and/or fee-free buffer zone if you become overdrawn. This means you will not be charged a fee and/or interest as long as you do not exceed the maximum limit of the buffer, but if you go further overdrawn interest and fees will apply to the whole amount borrowed After 6 April 2020, these will no longer be available although some providers may offer a 0% arranged overdraft limit (such as first direct, M&S Bank and TSB) where no interest is charged on amounts borrowed up to the limit even if you go on to borrow more.
If you think you are going to become overdrawn, and don’t have an arranged overdraft facility, contact your bank or building society to find out if you'll go beyond your interest-free buffer and see if you can get a temporary overdraft to avoid any charges.
Overdrafts should be used as a short-term credit option. They can be a useful buffer in emergencies but when used repeatedly may be a sign of a larger financial problem and could prove more costly than an alternative source of credit.
It’s always better to have an arranged overdraft than to go overdrawn without agreement from your bank. Practically, having an arranged overdraft means any payments up to your overdraft limit will be honoured and any failed payments fees avoided, whereas this is not guaranteed if you accidentally slip into an unarranged overdraft.
If you find your overdraft balance creeping up or staying the same, month after month, take action and read this guide to repaying your overdraft.
However, if you use your overdraft sparingly and pay it off within a couple of months, make sure your current account is competitive by checking out our selection of the best overdraft current accounts.
Banks do offer student bank accounts, many of which come with overdrafts.
It is possible to switch your current account while you are overdrawn.
Current account providers are now required to include tools on their websites to help you assess your eligibility for an overdraft before you apply.
An overdraft may be removed by your bank or building society at any time without notice. This could leave you with less money than you had planned for and may result in you missing certain payments or incurring additional charges.
Here are some suggested alternatives to overdrafts:
If you dip into your overdraft because of occasional retail spending, consider using a credit card instead.
You get an interest-free grace period of up to two months on a credit card (which you don't get from an overdraft) plus the added benefit of purchase protection on purchases over £100. Just be sure to clear the balance in full and by the payment due date or this option could become more expensive.
If you find you are using your overdraft more and more frequently or if you want to make a larger purchase, then a personal loan may prove to be more effective to borrow and pay back your debt in the longer-term.
However, payday loans should only be considered as a real last resort as they can charge significantly higher annual rates of interest!
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.