Overdrafts explained

An overdraft should be for short term borrowing or emergencies only. Unfortunately, it’s all too easy to treat it as your spending limit rather than as a last resort. Follow these steps to ensure you don’t exceed your overdraft limit and end up paying high fees.

How do overdrafts work?

An overdraft will allow you to borrow money through your current account. You might request one from your bank or your account may automatically offer you an overdraft (with your agreement).

Do you need an overdraft?

It can be very easy to think of your overdraft limit as your spending limit. But an overdraft should really only be an emergency fund or a short-term credit option. After all, if your overdraft is maxed out, then it won’t be available in a real emergency. You may also find it hard to get credit elsewhere.

When an overdraft is useful

An overdraft is best used for emergencies, for example, if you have a higher-than-expected bill and need a bit longer to repay it.

If you want to borrow more than your overdraft allows, or over a longer period, then you could be better off with a different kind of credit.

Authorised Overdrafts

Watch out

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

An authorised overdraft is an overdraft that has been agreed with your bank. You are allowed to borrow up to a pre-set overdraft limit. You will normally be charged for using the overdraft although how much you pay and the type of fee may vary from bank to bank.

The overdraft charge may be made up of:

  • interest, which can be up to 19.5%,  and/or
  • a daily, weekly or monthly fee

Check the fees

It is important to read your bank’s terms and conditions for overdrafts as many have complicated rules about how much they charge and it’s important to be clear about the costs of going overdrawn and of exceeding your authorised overdraft limit.

There are a few banks that advertise ‘interest-free overdrafts’ but these generally only apply to the first £100 of the overdraft or to overdrafts on student accounts.

Our current account comparison table shows a breakdown of overdraft charges when you compare accounts based on how you use them.

Unauthorised 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 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 – £2 a day or more (usually up to a set limit per month), and
  • 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

How to avoid overdraft fees

If you have decided that an overdraft is the right way for you to borrow money in the short term, make sure you avoid the highest fees.

Overdraft fees can quickly spiral, leaving you without enough money and forcing you to use your overdraft again. If you don’t use the right account, they can also be one of the most expensive ways to borrow in the long term.

Always seek authorisation

If you need to extend your overdraft and have a good reason then your bank is likely to be 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.

Read 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.

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.