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 fees when you use your overdraft.

 

 

Check your latest credit score

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.

 

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, normally at a set rate of interest. Some banks may charge a monthly or a daily usage fee, which may be instead of interest or in addition to 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 and potentially additional daily fees as well. Charges for unarranged overdrafts can be much higher than for arranged overdrafts, so they're a very expensive form of borrowing. If you know you're going to creep into an unarranged overdraft, try contacting your bank in advance to see if you can arrange a temporary arranged overdraft instead.
  • However, the Financial Conduct Authority is bringing in new rules in April 2020 to ban banks from charging more for unarranged overdrafts, and also banning fixed overdraft fees completely.

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:

  • A fixed fee – this could be a daily, weekly or monthly charge. These fees can range from 50p per day up to tens of pounds or more per month.
  • An interest charge – this is called the equivalent annual rate (EAR) and can range from 0% up to 39%.

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).

What are the new overdraft rules coming in 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 come 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 form April 2020?

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.

 

A guide to the new overdraft fees from April 2020

 

Provider  Account/Option Name  Old arranged overdraft charges New arranged overdraft charges
Interest rate (EAR) Usage fee Total cost for £50 over 7 days Total cost for £500 over 30 days Effective from date Interest Rate (EAR) Total cost for £50 over 7 days Total cost for £500 over 30 days
Barclays Bank Bank Account 0.00% £0.75 per day* £5.25 £22.50 22/03/2020 35.00% £0.29 £12.49
first direct 1st Account 15.90% £0.00   £0.00 £3.05 14/03/2020 39.90% £0.00 £7.00
Halifax Reward Current Account 0.00% £0.01 per £6 OD per day* £0.56 £24.90        
HSBC Bank Account 17.90% £0.00   £0.16 £6.81 14/03/2020 39.90% £0.16 £13.29
HSBC Advance 19.90% £0.00   £0.18 £7.52 14/03/2020 39.90% £0.16 £13.29
Lloyds Bank / Bank of Scotland Classic 0.00% £0.01 per £6 OD per day* £0.56 £24.90        
M&S Bank M&S Current Account 15.90% £0.00   £0.00 £4.88 14/03/2020 39.90% £0.00 £7.00
Metro Bank Current Account 15.00% £0.00   £0.13 £5.78        
Monzo Bank Monzo Current Account 0.00% £0.50 per day £3.50 £15.00 01/04/2020 19.00% £0.17 £7.20
Nationwide BS FlexAccount 18.90% £0.00   £0.17 £7.17 11/11/2019 39.90% £0.33 £13.99
Nationwide BS FlexDirect 0.00% £0.50 per day £3.50 £15.00 11/11/2019 39.90% £0.33 £13.99
NatWest / Royal Bank of Scotland Select Account 19.89% £6.00 per month £6.18 £13.51 02/04/2020 39.49% £0.32 £13.87
Santander 123 Current Account 0.00% £1.00 per day* £7.00 £30.00 06/04/2020 39.90% £0.33 £13.99
smile Current 18.90% £0.00   £0.17 £7.17        
Starling Bank Current Account 15.00% £0.00   £0.13 £5.78 01/04/2020 15.00% £0.13 £5.78
The Co-operative Bank Current Account 18.90% £0.00   £0.17 £7.17        
TSB Classic Plus 19.84% £6.00 per month £6.05 £12.97        
Virgin Money / Clydesdale Bank / Yorkshire Bank Virgin Money Current Account^ 12.50% £6.00 per month £6.11 £10.86 12/12/2019 19.90% £0.18 £7.52

What are overdraft buffers?

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.

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. 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.

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 or this option could become more expensive.

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.

man and woman helping a girl to ride a bike

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.

Cookies

Moneyfacts.co.uk will, like most other websites, place cookies onto your device. This includes tracking cookies.

I accept. Read our Cookie Policy