An overdraft can smooth out a tight month, but it’s a form of borrowing, and the costs add up if it becomes permanent.
Summary
- An arranged overdraft is agreed with your bank in advance; an unarranged overdraft happens when you spend beyond your balance or limit.
- Since April 2020, banks charge a single interest rate on overdrafts rather than fixed daily or monthly fees.
- Unarranged overdrafts can’t be priced higher than arranged ones.
- Overdrafts are repayable on demand and can affect your credit file if used heavily.
An overdraft lets you spend more than you have in your current account, up to a limit. It’s convenient, which is exactly why it’s easy to rely on more than intended. Understanding how overdrafts are priced makes it easier to use one sensibly.
Arranged vs unarranged
| Type | What it is | What to know |
|---|---|---|
| Arranged overdraft | A limit agreed with your bank in advance | Interest is charged on the amount you use |
| Unarranged overdraft | Spending beyond your balance or agreed limit | Payments may be refused; pricing can’t exceed the arranged rate |
How pricing works
Rules from the Financial Conduct Authority changed overdraft pricing in April 2020:
- Banks charge a single annual interest rate on overdrafts.
- Fixed daily and monthly overdraft fees were removed.
- Unarranged overdrafts can’t cost more than arranged ones.
- Some banks offer a small interest-free buffer.
Banks can still charge a refused payment fee in some cases, so check your account terms.
Bear in mind
Overdraft rates are often higher than those on personal loans or credit cards. Compare the cost if you expect to stay overdrawn for months rather than days.
Using an overdraft carefully
- Treat it as a short-term buffer, not as part of your monthly income.
- Set balance alerts in your banking app so you know when you dip below zero.
- Line up bills with payday where providers allow, to avoid being overdrawn just before you’re paid.
Getting out of your overdraft
- Work out how much you’re overdrawn on average across the month.
- Reduce it gradually, for example by aiming to finish each month a little higher than the last.
- If you’re switching banks, plan how to clear or move the balance. Our guide to switching current accounts explains why overdrafts don’t move automatically.
- Consider whether cheaper borrowing could replace a long-term overdraft, but borrow only what you can repay.
Take care
If you’re regularly overdrawn and struggling, talk to your bank before things get worse. Free, impartial debt advice is available through MoneyHelper, the government-backed guidance service.
Overdrafts and your credit file
Heavy or constant overdraft use can be visible to lenders, and going over your limit or having payments refused can count against you. Our guide to UK credit reports explains what lenders see.
The bottom line
Use an arranged overdraft as a short-term cushion, keep an eye on the interest, and work towards a positive balance at the end of each month. A household budget, like the one in our guide to UK household bills, makes that much easier.
Questions readers ask
Is an overdraft bad for my credit score?
Using an arranged overdraft responsibly isn’t necessarily a problem, but constant use, going over your limit or missed payments can affect how lenders see you.
Can my bank remove my overdraft?
Yes. Overdrafts are usually repayable on demand, so a bank can reduce or withdraw one, though it should treat you fairly and give notice in most situations.
What should I do if I can’t clear my overdraft?
Talk to your bank early. Banks are expected to support customers in financial difficulty, and free debt advice is available through MoneyHelper.
This guide is general information, not financial advice. Rules, rates and allowances can change, so check the latest details with the provider, GOV.UK or the Financial Conduct Authority before making decisions. For advice on your own circumstances, speak to an FCA-authorised financial adviser.