When you use your overdraft (often called “going into your overdraft”), you’re getting into debt. An overdraft should be for short-term borrowing or emergencies only. It’s important to manage an overdraft like any other debt and make sure the costs don’t get out of hand. This guide looks at how overdrafts work, how to stop going over your limit and how to avoid bank charges.
How does an overdraft work?
An overdraft lets you borrow money through your current account by taking out more money than you have in the account – in other words you go “overdrawn”. There’s usually a charge for this.
You can ask your bank for an overdraft – or they might just give you one – but don’t forget that an overdraft is a type of loan that often has interest. If you need to borrow money, there might be cheaper ways to do it. It’s important to always find the cheapest way to borrow.
You can find out more on our guide Do you need to borrow money?
Types of overdraft
Authorised overdrafts: are arranged in advance, so they’re also known as ‘arranged’ overdrafts. You agree a limit with your bank and can spend money up to that limit.
Unauthorised overdrafts: these are also known as ‘unplanned’ or ‘unarranged’ overdrafts and happen when you spend more than you have in your bank account without agreeing it in advance. This includes going over the limit of an authorised overdraft.
See the section below for details of interest and fees charged on both types of overdraft.
Overdraft charges
Help with the cost of living
Worrying about money because of rising rents, high energy bills or debt? If so, we're here to help.
Take the first steps to find your way forward with our guides to help you with the cost of living.
Major changes affecting the cost of overdrafts were introduced in April 2020. Banks used to charge higher fees for unauthorised overdrafts, but since April 2020 they are not allowed to do this.
Interest on all overdrafts is charged at a single annual interest rate (APR), making it easier to compare charges between accounts.
Interest rates from banks and building societies on their overdrafts range from 19% to 40% or more.
If you’re worried, unsure or think you’re now worse off because of these changes, then:
- Contact your bank. Banks might, for example, reduce or waive interest, offer a continuation of overdraft borrowing at the current rate of interest, or agree on a repayment programme, which might include a personal loan. Speak to your bank or building society as soon as you can.
- If you feel vulnerable for any reason, explain your circumstances and your provider is obliged to take this into consideration.
- If these changes mean you’re struggling to pay bills or fall into debt, or you’re already in debt, you should find help as soon as possible.
Have you missed a payment?
Use our Debt advice locator tool to find free and confidential debt advice online, over the phone or near to where you live.
Do you need an overdraft?
Using your overdraft too much?
If you find yourself dipping into your overdraft frequently, you might want to use our Budget Planner to take control of your money.
Overdrafts can be useful for some people. They can help you avoid fees for bounced or returned payments. These happen when you try to make a payment but your account doesn’t have enough money in it.
But overdrafts should only be used for emergencies or as a short-term option.
The Financial Conduct Authority (FCA) says that many people underestimate how much they use their overdrafts. If you’re using your overdraft more than you think, it might be costing you more than you realise.
If you’re using your overdraft a lot, read our tips below on how to avoid doing this. They might help you save money. If you find you’re constantly in your overdraft and don’t have the money to pay it down quickly, it might be cheaper to borrow using a personal loan or 0% credit card.
Search for a better current account
If you don’t use the right account, overdrafts can be one of the most expensive ways to borrow in the long term. Comparison websites can help you find a current account tailored to your needs.
For places to go to help you choose the right account for you, take a look at our guide on Current accounts
Can I switch banks if I’m overdrawn?
Yes, you can switch using the Current Account Switch Service
You should check you’re getting a better deal before switching your account by shopping around using comparison tables to help find accounts with overdrafts Make sure you check the charges and overdraft rules for each account.
Read our guide How to open, switch or close your bank account
Tips for controlling your overdraft
Keep an eye on your account balance
Keeping track of your account balance is one of the best ways to avoid overdraft costs.
Make it as easy as possible by:
- downloading your bank’s app if you have a smartphone
- setting up text alerts for when your balance is low
- using phone banking.
Compare bank accounts
Use our Bank account fees and charges comparison tool to see all the fees and charges that apply to bank accounts – it shows everything from overdraft fees to foreign cash withdrawal charges.
Keep reading your bank’s letters
It’s easy to get in the habit of not opening letters from the bank and assuming they’re just routine correspondence.
It’s important to check all letters, as the bank might be writing to tell you about a change to your overdraft limit or increase to your overdraft interest rate.
Use savings if you have some
If you have savings as well as an overdraft, it’ll be cheaper in the long run to use your savings to pay it off. If you then get an unexpected cost, you can still use your overdraft to pay for it. And if you don’t, you can start building up your savings again so you’re ready for that unexpected expense.
Find ways to live on a budget
To lower your overdraft as quickly as possible, cutting back spending will help you free up money. The money you save can then be used to pay off your overdraft.
Find out more in our guide Living on a squeezed income
Switch banks
Switch to a bank account with lower overdraft charges. If you often dip into your overdraft shop around for one with the lowest charges. You may even be able to switch to an account with a switching bonus, which will help you to clear your overdraft.
Find out more in our guide How to switch bank accounts
More tips on cutting overdraft costs
If you think you’ve been charged unfairly
If you’ve been charged fees you think are unfair, or if you’re really struggling to pay the fees, you might be able to get them back.
Don’t go to a claims management firm though – it’s easy and just as effective to do it yourself, and you won’t have to pay someone else.
Learn more in our guide How to reclaim unfair bank charges
Beware – your bank overdraft could be taken away
One reason that an overdraft isn’t safe for long-term borrowing is that it’s not guaranteed. The bank could take it away if they think your're over-using it and are in financial difficulty.
But if your bank cancels your overdraft with no warning, you might have grounds to complain.
If you complain to your bank and you aren’t satisfied with the outcome, you can take your complaint to the Financial Ombudsman Service.
