Overdrafts

When you go into your overdraft, you’re getting into debt. An overdraft should be for short-term borrowing or emergencies only.

It’s important you manage an overdraft like any other debt to make sure the costs don’t spiral. This guide looks at how overdrafts work, how to cut costs and stop going over your limit, and how to avoid bank charges.

How does an overdraft work?

An overdraft will allow you to borrow money through your current account. Usually there's a charge.

You might request one from your bank or your account may automatically offer you an overdraft with your agreement.

An overdraft is a debt. You’re using money that’s being loaned to you from your bank. If you need to borrow money, it’s important to find the cheapest way to borrow.

Types of overdraft

  • Authorised overdrafts are arranged in advance. You agree a borrowing limit with your bank, and you can spend money up to that limit through all the normal payment methods. There are often fees even with authorised overdrafts.
  • Unauthorised overdrafts, also known as unplanned overdrafts, happen when you spend more than you have in your bank account without agreeing it in advance. They can also happen if your bank has agreed an overdraft for you but you go over the limit they’ve set. You will pay extra charges and these can mount up very quickly.

See below for more information on each type of overdraft and how to avoid fees.

TAKE CARE!

If you go overdrawn by more than you've agreed with your bank you could be charged over a hundred pounds in a month!

Do you need an overdraft?

Overdrafts can be useful for some people. An arranged overdraft can help you avoid fees from bounced payments for bills that happen when your account doesn’t have enough money in it.

But overdrafts should only be an emergency fund or short-term credit option.

If you’re using your overdraft regularly read our tips on avoiding using your overdraft, below, to help you save money.

The Financial Conduct Authority (FCA) found that many people underestimate their overdraft use. If you’re using your overdraft more than you think, it might be costing you more than you realise.

Arranged or authorised overdrafts explained

An authorised overdraft is an overdraft that has been agreed with your bank. It allows you to borrow up to a pre-set overdraft limit.

Fees for using authorised overdrafts

You will normally be charged for using the overdraft, though how much you pay and  how charges are worked out will vary from bank to bank and how much you are overdrawn.

Money fitness tip

Stay within your overdraft limit. If you think you're going to go over it, ask your bank for a higher limit or extension. You might be charged a fee, but it could save a lot more.

The overdraft charge may be made up of:

  • Interest, which can be up to 15-20% equivalent annual rate (EAR)
  • A fee which could be daily (50p-£3 a day), weekly or monthly

A daily fee can be expensive, especially if you only go overdrawn by a small amount.

Some bank accounts that charge fees might offer you a limited interest-free overdraft as a benefit of having the account 

How to check the fees

It is important you understand the costs of going overdrawn. So, to find out how they work, you can:

  • call the bank to explain all the costs of an overdraft
  • look on the bank’s website for fees for your account
  • read your bank’s terms and conditions for overdrafts in their printed guides
  • 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.

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.

If you have paid overdraft fees in the past, look for an account with lower or no fees.

Can I switch banks if I’m overdrawn?

Yes, you can switch using the Current Account Switch Service

Read Switching bank accounts if you have an overdraft.

How can I switch my current account if it has an overdraft?

Make sure you’re getting a better deal before switching your account. Shop around using comparison tables to help find accounts with overdrafts and make sure you check and understand the charges and overdraft rules for each account.

Find out more on our switching your current account if you have an overdraft page.

Unarranged or unauthorised overdrafts (unplanned overdrafts)

Exceeding your authorised overdraft limit, or going into the red when the bank has not agreed an overdraft limit, is known as an unauthorised overdraft (or an unplanned overdraft). 

BEWARE!

An unauthorised overdraft can work out even more expensive than a payday loan as you will pay extra charges as well as interest and these can mount up very quickly.

This can be very costly and should be avoided at all costs.

Unauthorised overdraft fees

Unauthorised overdrafts come with lots of different fees.

  • Monthly fee - anything from £5 to £35 or more
  • Daily fee - can be £1 to £6 a day or more (usually up to a set limit per month)
  • Transaction fees - can be £10 to £25 for every cash withdrawal, Direct Debit or standing order, cheque or card payment you make – whether or not your bank allows the payment.

Current accounts now have a Monthly Maximum Charge (MMC) in place, which is the maximum amount you’d pay each month in fees, charges and interest on unarranged overdrafts. It doesn’t affect authorised overdrafts, and is a different amount depending on the bank or building society, and which current account you have.

Make sure you check what the MMC is with your current account so you know how much your overdraft is costing you.

How to avoid overdraft fees

Money fitness tip

Check the fees so you don't get into unnecessary debt. 

Overdraft fees can quickly spiral, leaving you without enough money and forcing you to use your overdraft again.

If you do go into your overdraft, there are some steps you can take.

Tips for controlling your overdraft

If you think you will go over your limit, talk to your bank and ask for a higher limit or an extension. You might be charged a fee, but it'll be cheaper than the charges from an unarranged ovrdraft. 

Keep an eye on your account balance

It may seem obvious but keeping track of your account balance is one of the best ways to avoid incurring overdraft costs.

Making it easy to do is key:

  • Download your bank’s app on your phone.
  • Set up text alerts if you have a low balance.
  • Use phone banking.

Consider asking your bank for help

 

Speak to your bank to increase your overdraft - If you need to extend your overdraft and have a good reason and a plan to repay it, your bank is likely to be more sympathetic – as long as you let them know in advance.

Phone your bank first and ask for your limit to be temporarily increased.

Don’t leave it until the last minute – or worse – after you go into the red.

Ask your bank to waive the fee - if you slip up and end up with a fee, ask the bank if they’ll cancel it.

If your bank won’t waive your fees, read our guide on how to Take action to reduce your debt.

Keep reading your bank's letters

It’s easy to get in the habit of not opening letters from the bank and assuming they are just routine correspondence.

It’s important to check all letters as the bank may be writing to tell you about a change to your overdraft limit or increase to your overdraft fees.

Use savings if you have some

If you have savings as well as an overdraft, it’s cheaper in the long run to use your savings to pay off your overdraft instead of paying overdraft fees. 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 and shrink your overdraft fees, cutting back in other places will help you free up money. The money you save can then be used to pay off your overdraft.

Find some tricks and tactics for Living on a budget.

Switch banks

Switch to an overdraft-friendly bank account. Many banks offer interest-free, fee-free overdrafts from £100 to £300. You may even be able to switch to an account with a switching bonus which will help you to clear your overdraft.

Find out How to switch bank accounts.

More tips on cutting overdraft costs

Visit MoneySavingExpert for more tips and tricks on cutting the cost of overdfrafts. 

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, you might be able to reclaim them. Don’t go to a claims management firm – it’s easy and just as effective to do it yourself and you won’t have to pay someone else.

Beware – your 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 withdraw it at any time and leave you without the cash you thought you had access to.

However, if your bank cancels your overdraft with no warning and you incur charges as a result, you may 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.

Read more about complaining on the Financial Ombudsman Service website

 

Last reviewed: 08/03/2019

This content has been provided by the Money Advice Service