How does a current account overdraft work? |

Published: 01/03/2019

At a glance

  • An overdraft is a form of credit which happens when more money is taken from a bank account than is held in it.
  • Overdrafts can be arranged with your bank account provider or unarranged.
  • Whether you get an arranged overdraft will depend on your credit score and financial situation.

What is an overdraft?

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.

How do overdrafts work?

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 interest charges when you use your overdraft.



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What are the different types of overdraft?

There are two types of overdraft: arranged and unarranged:

Arranged overdrafts

  • Arranged overdrafts or authorised overdrafts are pre-agreed and allow you to go overdrawn (or borrow) up to a certain limit, charged at a set rate of interest.

Unarranged overdrafts

  • Unarranged overdrafts or unauthorised overdrafts are not pre-agreed. This may be because you don't have an arranged overdraft at all, or you have gone over your arranged overdraft limit. The bank or building society may honour your payments, although they will probably charge you a fee for doing so. Banks can no longer charge more for unarranged overdrafts than for arranged ones, but could still negatively affect your credit score. If you know you're going to creep into an unarranged overdraft, try contacting your bank in advance to see if you can arrange or extend a temporary arranged overdraft instead.

Moneyfacts tip

Moneyfacts tip Leanne Macardle

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.

What are overdraft fees and charges?

Overdraft fees consist of:

In some cases, banks will have a zero rate overdraft tier on an authorised or arranged overdraft up to a set limit. You must check with your bank if your account has this facility.

Unarranged overdrafts will have the same fee structure.

The fees and charges for overdrafts are changing from April 2020. This follows a new set of rules from the Financial Conduct Authority (FCA).

Changes to overdraft charges due to Coronavirus

Due to the current emergency regarding the Coronavirus a number of banks are introducing temporary changes to the way they operate overdrafts. This is being done to help people who may be experiencing financial difficulties due to the pandemic.

Barclays are waiving interest on all overdrafts from 27 March to 30 April 2020, although this may be reviewed and extended if necessary.

HSBC is introducing an interest-free overdraft buffer of £300 on their overdrafts for customers with their bank or advance accounts from 26 March 2020. This will be in place for three months and is a sizeable increase on their previous interest-free limit of £25.

Lloyds, Halifax and Bank of Scotland customers will be able to access an interest-free overdraft of £300 from 6 April 2020. No action is needed by those who already have an authorised overdraft and this will remain in place until 6 July 2020.

NatWest and Santander are believed to be introducing similar temporary overdraft changes but details are still currently unavailable.

What are the new overdraft rules from April 2020?

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 came into force on 6 April 2020 and include:

  • Unarranged overdrafts can no longer be priced higher than arranged overdrafts
  • A ban on fixed daily or monthly overdraft fees
  • A ban on fees to have an overdraft available
  • The use of a simple interest rate (EAR) for overdrafts
  • Mandatory use of annual percentage rates (APRs) for overdraft pricing on advertising
  • More action to identify those who show signs of financial distress and to implement strategies to reduce repeat overdraft usage.

What are the new overdraft fees and charges from April 2020?

From April 2020, overdrafts can only come with an interest rate charge – all fixed charges have stopped. 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 before you choose a current account. They are open-ended so don’t have a specific end date when the debt must be repaid.

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.

A guide to the new overdraft fees from April 2020


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 06/04/2020 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
HSBC Advance 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 06/04/2020     £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 25/04/2020 34.00%   £0.28 £12.18
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 39.90%   £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 0.00%   £0.00 £0.00
The Co-operative Bank Current Account 18.90% £10.00 per day + £10pm £60 £60.00 £60.00 04/04/2020 35.90% £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

* - The overdraft rate applied by Starling Bank are dependent on a customer’s credit rating so they could be as high as 25.0% AER or 35.0% AER

** - The overdraft rates applied by Monzo Bank are dependent on a customer’s credit rating so they could be as high as 29.0% AER or 39.0% AER

*** - The overdraft rates applied by Clydesdale Bank are dependent on a customer’s credit rating

**** - The overdraft rates applied by Yorkshire Bank are dependent on a customer’s credit rating so they could be as high as 29.90% EAR, 39.90% EAR or 49.90% EAR

^Old overdraft charges based on B Current Account which was withdrawn from sale on 29th November 2019

Do you need an overdraft?

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. 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.

Can I get an overdraft as a student?

Banks do offer student bank accounts, many of which come with overdrafts.


Can you switch your bank account when you are overdrawn?

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.


Can my overdraft be removed?

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. 

What are the alternatives to overdrafts?

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.

Personal loan

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.

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At a glance

  • An overdraft is a form of credit which happens when more money is taken from a bank account than is held in it.
  • Overdrafts can be arranged with your bank account provider or unarranged.
  • Whether you get an arranged overdraft will depend on your credit score and financial situation.

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