Overdrafts explained | MoneyHelper

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”. Gotapensionquestion?Ourhelpisimpartialandfreetouse.Getintouchonlineoroverthephoneon08000113797 Close Home Everydaymoney Typesofcredit Everydaymoney Typesofcredit Overdraftsexplained Whenyouuseyouroverdraft(oftencalled“goingintoyouroverdraft”),you’regettingintodebt.Anoverdraftshouldbeforshort-termborrowingoremergenciesonly.It’simportanttomanageanoverdraftlikeanyotherdebtandmakesurethecostsdon’tgetoutofhand.Thisguidelooksathowoverdraftswork,howtostopgoingoveryourlimitandhowtoavoidbankcharges. What’sinthisguide Howdoesanoverdraftwork? Overdraftcharges Doyouneedanoverdraft? CanIswitchbanksifI’moverdrawn? Tipsforcontrollingyouroverdraft Ifyouthinkyou’vebeenchargedunfairly Beware–yourbankoverdraftcouldbetakenaway Howdoesanoverdraftwork? Anoverdraftletsyouborrowmoneythroughyourcurrentaccountbytakingoutmoremoneythanyouhaveintheaccount–inotherwordsyougo“overdrawn”.There’susuallyachargeforthis. Youcanaskyourbankforanoverdraft–ortheymightjustgiveyouone–butdon’tforgetthatanoverdraftisatypeofloan.Ifyouneedtoborrowmoney,theremightbecheaperwaystodoit.It’simportanttoalwaysfindthecheapestwaytoborrow. Youcanfindoutmoreonourguide Doyouneedtoborrowmoney? Typesofoverdraft Authorised overdrafts: arearrangedinadvance,sothey’realsoknownas‘arranged’overdrafts.Youagreealimitwithyourbankandcanspendmoneyuptothatlimit. Unauthorisedoverdrafts: thesearealsoknownas‘unplanned’or‘unarranged’overdraftsandhappenwhenyouspendmorethanyouhaveinyourbankaccountwithoutagreeingitinadvance.Thisincludesgoingoverthelimitofanauthorisedoverdraft. Seebelowfordetailsofinterestandfeeschargedonbothtypesofoverdraft. Backtotop Overdraftcharges UseourMoneyNavigatorTool Haveyougotmoneyworriesbecauseofcoronavirus?Ifso,you’renotalone. Forinstantmoneyguidancebasedonyourcircumstances,getstartedwithour MoneyNavigatorTool MajorchangesaffectingthecostofoverdraftswereintroducedinApril2020.Banksusedtochargehigherfeesforunauthorisedoverdrafts,butsinceApril2020theyarenotallowedtodothis. Interestonalloverdraftsischargedatasingleannualinterestrate(APR),makingiteasiertocomparechargesbetweenaccounts. Interestratesfrombanksandbuildingsocietiesontheiroverdraftsrangefrom19%to40%ormore. Ifyou’reworried,unsureorthinkyou’renowworseoffbecauseofthesechanges,then: Contactyourbank.Banksmight,forexample,reduceorwaiveinterest,offeracontinuationofoverdraftborrowingatthecurrentrateofinterest,oragreeonarepaymentprogramme,whichmightincludeapersonalloan.Speaktoyourbankorbuildingsocietyassoonasyoucan. Ifyoufeelvulnerableforanyreason,explainyourcircumstancesandyourproviderisobligedtotakethisintoconsideration. Ifthesechangesmeanyou’restrugglingtopaybillsorfallintodebt,oryou’realreadyindebt,youshouldfindhelpassoonaspossible. Findoutmoreinourblogabout Whatthechangestooverdraftfeesmeanforyou. Isyourhouseholdincome getting squeezed? Ifyou’refacinghigherlivingcosts,buthavelittleornoextramoneycomingin,find outabout extrasourcesofincomeandsupportavailabletohelpyoumanageyour householdbillsandsavemoneyinourguideLivingonasqueezedincome Backtotop Doyouneedanoverdraft? Usingyouroverdrafttoomuch? Ifyoufindyourselfdippingintoyouroverdraftfrequently,youmightwanttouseour BudgetPlanner totakecontrolofyourmoney. Overdraftscanbeusefulforsomepeople.Theycanhelpyouavoidfeesforbouncedorreturnedpayments.Thesehappenwhenyoutrytomakeapaymentbutyouraccountdoesn’thaveenoughmoneyinit. Butoverdraftsshouldonlybeusedforemergenciesorasashort-termoption. TheFinancialConductAuthority(FCA)foundthatmanypeopleunderestimatehowmuchtheyusetheiroverdrafts.Ifyou’reusingyouroverdraftmorethanyouthink,itmightbecostingyoumorethanyourealise. Ifyou’reusingyouroverdraftalot,readourtipsbelowonhowtoavoiddoingthis.Theymighthelpyousavemoney.Ifyoufindyou’reconstantlyinyouroverdraftanddon’thavethemoneytopayitdownquickly,itmightbecheapertoborrowusingapersonalloanor0%creditcard. Comparebankaccounts Useour Bankaccountfeesandchargescomparisontool toseeallthefeesandchargesthatapplytobankaccounts–itshowseverythingfromoverdraftfeestoforeigncashwithdrawalcharges. Searchforabettercurrentaccount Ifyoudon’tusetherightaccount,overdraftscanbeoneofthemostexpensivewaystoborrowinthelongterm.Comparisonwebsitescanhelpyoufindacurrentaccounttailoredtoyourneeds. Forplacestogotohelpyouchoosetherightaccountforyou,takealookatourguideon Currentaccounts  Backtotop Wanttofeelmoreincontrolofyour finances? OurfreeandflexibleCouchtoFinancialFitnessplanwillhelpyoubuildconfidencetomanageyourmoney.  Stepbystepwecanhelpyoucutyourspending,developcoresavingmuscles,andcreatebetterhabitsfor the future.Signupforthe MoneyHelper CouchtoFinancialFitnessplan. CanIswitchbanksifI’moverdrawn? Yes,youcanswitchusingthe CurrentAccountSwitchService Youshouldcheckyou’regettingabetterdealbeforeswitchingyouraccountby shoppingaroundusingcomparisontablestohelpfindaccountswithoverdrafts Makesureyoucheckthechargesandoverdraftrulesforeachaccount. Readourguide Howtoopen,switchorcloseyourbankaccount Backtotop Tipsforcontrollingyouroverdraft Keepaneyeonyouraccountbalance Keepingtrackofyouraccountbalanceisoneofthebestwaystoavoidoverdraftcosts. Makeitaseasyaspossibleby: downloadingyourbank’sappifyouhaveasmartphone settinguptextalertsforwhenyourbalanceislow usingphonebanking. Comparebankaccounts Useour Bankaccountfeesandchargescomparisontool toseeallthefeesandchargesthatapplytobankaccounts–itshowseverythingfromoverdraftfeestoforeigncashwithdrawalcharges. Keepreadingyourbank’sletters It’seasytogetinthehabitofnotopeninglettersfromthebankandassumingthey’rejustroutinecorrespondence. It’simportanttocheckallletters,asthebankmightbewritingtotellyouaboutachangetoyouroverdraftlimitorincreasetoyouroverdraftinterestrate. Usesavingsifyouhavesome Ifyouhavesavingsaswellasanoverdraft,it’llbecheaperinthelongruntouseyoursavingstopayitoff.Ifyouthengetanunexpectedcost,youcanstilluseyouroverdrafttopayforit.Andifyoudon’t,youcanstartbuildingupyoursavingsagainsoyou’rereadyforthatunexpectedexpense. Findwaystoliveonabudget Toloweryouroverdraftasquicklyaspossible,cuttingbackspendingwillhelpyoufreeupmoney.Themoneyyousavecanthenbeusedtopayoffyouroverdraft. Findoutmoreinourguide Livingonabudget Switchbanks Switchtoabankaccountwithloweroverdraftcharges.Ifyouoftendipintoyouroverdraftshoparoundforonewiththelowestcharges.Youmayevenbeabletoswitchtoanaccountwithaswitchingbonus,whichwillhelpyoutoclearyouroverdraft. Findoutmoreinourguide Howtoswitchbankaccounts Moretipsoncuttingoverdraftcosts Formoretipsandtricksoncuttingthecostofoverdrafts,visit MoneySavingExpert(Opensinanewwindow)(Opensinanewwindow) Backtotop Ifyouthinkyou’vebeenchargedunfairly Ifyou’vebeenchargedfeesyouthinkareunfair,orifyou’rereallystrugglingtopaythefees,youmightbeabletogetthemback. Don’tgotoaclaimsmanagementfirmthough–it’seasyandjustaseffectivetodoityourself,andyouwon’thavetopaysomeoneelse. Learnmoreinourguide Howtoreclaimunfairbankcharges Backtotop Beware–yourbankoverdraftcouldbetakenaway Onereasonthatanoverdraftisn’tsafeforlong-termborrowingisthatit’snotguaranteed.Thebankcouldtakeitawayiftheythinkyour'reover-usingitandareinfinancialdifficulty. Butifyourbankcancelsyouroverdraftwithnowarning,youmighthavegroundstocomplain. Ifyoucomplaintoyourbankandyouaren’tsatisfiedwiththeoutcome,youcantakeyourcomplainttotheFinancialOmbudsmanService. Readmoreaboutcomplainingonthe FinancialOmbudsmanServicewebsite Backtotop Wasthisinformationuseful? Yes No Thankyouforyourfeedback. We’realwaystryingtoimproveourwebsiteandservices,andyourfeedbackhelpsusunderstandhowwe’redoing. Sharethisarticle Email Facebook Twitter Moreoptions Sharethiswith WhatsApp LinkedIn Copythislink Copy Close Copythislink Copy Close Explorethistopic Close Typesofcredit Overdrafts Overdraftsexplained Lookingforus?Now,we’reMoneyHelper MoneyHelperisthenew,easywaytogetclear,free,impartialhelpforallyourmoneyandpensionchoices.Whateveryourcircumstancesorplans,moveforwardwithMoneyHelper. Continuetowebsite DonotshowthismessageagainforMoneyAdviceService Lookingforus?Now,we’reMoneyHelper MoneyHelperisthenew,easywaytogetclear,free,impartialhelpforallyourmoneyandpensionchoices.Whateveryourcircumstancesorplans,moveforwardwithMoneyHelper. 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