Current accounts with overdraft

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How does an overdraft work?

If there isn’t enough money in your account to cover your spending or a cash withdrawal, you’ll become overdrawn. This is shown as a negative amount on your bank balance.

An overdraft lets you borrow extra money through your current account, and it’s usually set at an agreed limit with your bank or lender.

But there’s a big difference between an arranged and an unarranged (or unauthorised) overdraft.

Arranged overdraft

An arranged overdraft is one that’s agreed in advance with your bank or building society. But not all bank accounts are eligible for one.

Arranged overdrafts usually come with an interest-free buffer, which is the amount you can owe before you’ll be charged interest.

You may be offered an overdraft automatically when you apply for a current account, or you might have to request one.

If you repeatedly exceed your arranged limit, your bank may reduce or remove the overdraft facility.

Unarranged overdraft

An unarranged overdraft is when you spend more money than is in your current account, or you go over an authorised overdraft limit without agreeing this with your bank or building society first.

This unauthorised amount won’t benefit from an interest-free buffer, so you’ll automatically be charged interest when you go overdrawn.

Some banks have a monthly cap on unarranged overdraft charges, which will vary between providers.

The lender may honour your payments, but they’ll probably charge you a fee for doing this. However, some banks now refuse unarranged overdrafts and will just decline transactions instead.

Having an unarranged overdraft is likely to damage your credit score.

How much do overdrafts cost?

Since April 2020, the way that banks and building societies charge for overdrafts changed.

Banks must now charge the same flat annual interest rate - called the equivalent annual rate (EAR) – for both arranged and unarranged overdrafts.

They’re no longer allowed to charge daily or monthly overdraft fees and there won’t be higher interest rates or extra charges for unauthorised overdrafts, although you may still incur an unpaid transaction fee.

The EAR helps you compare overdrafts against other products and lenders.

The interest rates vary between lenders but many have EARs of 39.9% and a typical interest-free overdraft limit is around £500.

Should I get a bank account with an overdraft?

Before you make a decision, there are a number of pros and cons to consider:

Advantages

Avoid missing payments - Having overdraft protection means your transactions and bills will still be paid even if there isn’t enough money in your account
Flexible way to borrow - It lets you borrow as much as you like up to your agreed limit and you can pay it back without incurring an early repayment fee
Emergency access to funds - An overdraft can help cover unexpected bills and act as a short-term safety net before your next payday
Useful for variable income - If your earnings change from month to month, an overdraft can help cover any temporary short-fall
Quick to apply for - There’s less paperwork than other forms of lending, like a credit card or loan

Disadvantages

You’re likely to be charged interest - Once you go outside of your interest-free limit you’ll be charged interest daily, which is added to your account on a monthly basis
Other products may have better rates - Overdraft interest rates can be higher than other ways of borrowing - an unsecured loan is usually a better option for long-term borrowing
You may damage your credit score - Going over your agreed overdraft limit or using an unarranged overdraft can negatively impact your credit rating and future chances of accessing credit
Borrowing limits are less than a loan - Whereas you could borrow £10,000 or more with a personal loan, typical maximum overdraft limits are much less than this
You may be tempted to overspend - When an overdraft’s packaged with a current account, it might be seen as a perk rather than to be used for emergency borrowing

How much overdraft can I get?

The overdraft limit offered will depend on your financial circumstances when you first apply to open your account.

Each bank has its own rules and criteria for who is eligible for an overdraft. They’ll look at your outgoings and income, as well as your credit score and employment status.

You can get overdrafts that range from small amounts under £100, up to thousands of pounds.

Once you’ve opened your account, your bank may let you extend your overdraft, but it can also choose to reduce or cancel it at any point.

How to apply for a bank account with an overdraft

When you’re looking for a bank account, it’s best to shop around to make sure you get the best rates and incentives.

To apply for a new account, you’ll need to:

Compare current accounts with overdrafts

We can help you compare accounts in minutes. You can filter by what’s important to you - a better interest rate, switching incentives or a specific provider
Check eligibility criteria

Take a look at eligibility criteria before you apply. Many banks have online tools to help you see whether you’re likely to be accepted for an arranged overdraft
Gather documents you may need

You’ll need to provide any previous addresses for the last three years, proof of your identity and current address, as well as details of your employment and income
Apply online or in branch

The quickest and easiest way is to apply online, but most banks will let you can go into a branch or apply over the phone
Provide personal details and agree to a credit check

You’ll need to give details like your age, gender, marital status, and nationality. And you’ll need to agree to a credit check

Overdraft limits will differ between providers, so if you need a larger amount, you’ll have to check what limit the provider offers.

Which other accounts can have an overdraft?

While it’s mostly current accounts that come with overdrafts, it’s also possible to have an overdraft with some student accounts.

Student account overdrafts are interest-free until you graduate, so they can be a good option for providing you with a buffer in case of emergencies.

Many student accounts offer tiered overdraft amounts which increase each year of your studies, but this will also increase the potential for getting into debt.

If your existing regular current account doesn’t have an overdraft facility, it’s possible to switch to a new one that has an arranged overdraft. You can do this by using your bank’s free current account switching service.

Tips for paying off your overdraft

Using your overdraft for a long time is an expensive way to borrow money, so try to pay it off as soon as you can.

To get started, try doing the following:

Draw up a budget

Work out what you’re spending each month, as well as your income. Look at your typical balance before you get paid. See if there are any areas you can save or cut back on and put this money towards paying off your overdraft
Use your savings

If you’ve got money in a savings account, use this to pay off your overdraft. Then, once you’ve paid off your overdraft, you can start to build your savings back up again
Switch to a cheaper overdraft

See if you can switch your account to a new provider. If you’re eligible, you may be able to get a cheap or 0% overdraft when you switch banks, which can help you pay off your debt more quickly
Consider lower rate options

If you can’t do the above, look at low-rate personal loans or consider moving your debt to a 0% credit card - you can usually get an interest-free period of up to 18 months
Speak to your bank or building society

Explain you want to pay off your overdraft and see whether they’ll agree to reduce your limit gradually each month. They might even be willing to pause interest and charges on your overdraft for a time

What can I do to reduce my charges?

If you find your overdraft costs are adding up and you’re unhappy with how much you’re being charged, it’s best to shop around.

It’s usually possible to switch accounts to a different bank with a cheaper overdraft. But some interest-free overdrafts only last for a set time, so it’s important to check before you make the switch.

You could also look at other cheaper lending options, like a personal loan or a credit card with a 0% interest period.

Frequently asked questions

Can I get an overdraft if I have bad credit?

If you’ve got a poor credit score, you’ll find it harder to be approved for a current account.

You might find that a basic bank account or a guaranteed account - which don’t require a credit check - are better options.

However, these basic accounts don’t come with an overdraft.

If you need an overdraft, there are typically only a few providers that offer them to people with poor credit, but you’re likely to be charged higher interest rates than standard.

To increase your chances of being accepted with a poor credit rating:

Opt for a smaller overdraft limit - You may find it easier to be accepted for a smaller overdraft. Paying it back reliably each month will improve your chances of getting an increase on your limit further down the line
Pay off your debts – If you only have a small amount of debt and are able to pay it off first, this will increase your likelihood of being accepted
Compare and shop around - Compare accounts and lending options for people with bad credit and see what the best deals and rates are
Improve your credit rating - Making your payments regularly and showing you can manage your money responsibly can increase your credit score. You could consider taking out a credit builder account which can help with this

If you’re struggling with debt, you can get independent advice from organisations like Citizens Advice, National Debtline and StepChange Debt Charity.

Does using an overdraft affect my credit score?

This will depend on the type of overdraft you’re using and how you use it.

Using an arranged overdraft is unlikely to affect your score, as long as you pay it off regularly and don’t go over your limit.

In fact, using an overdraft correctly could have a positive impact on your score.

But an overdraft will still show on your credit report as debt - so lenders will be able to see what your limit is, how much of it you’re using, and if you’re regularly clearing what you owe.

Going over your agreed limit, not making efforts to pay it back, or repeatedly going into an unarranged overdraft will damage your credit score.

If you want to see whether your credit report has been affected, you can check this through one of the three main credit reference agencies: Experian, Equifax, and TransUnion.

Will applying for an overdraft affect my credit rating?

Applying for an overdraft as a one-off won’t usually affect your credit rating. But if you make several applications in a short period, it can indicate you’re struggling financially and it may temporarily impact your credit score.

To help you avoid applying for accounts where you’re unlikely to be accepted, many banks have an online overdraft eligibility checker tool you can use.

This uses a soft search to assess the likelihood of you being approved so it won’t leave a mark on your credit file.

Can I switch banks if I’m using an overdraft?

Yes, if you’re already using an arranged overdraft, it’s still possible to switch accounts.

This is generally on the basis that you’ve got a good or reasonable credit history and you haven’t gone over your agreed limit.

To try and cut your costs, compare rates and fees between what you’re currently being charged and what other banks are offering.

You can do this by comparing the EAR on overdrafts between different providers.

Most banks and building societies are signed up to the Current Account Switch Scheme (CASS), which makes the process quick and easy. It will even automatically move all your direct debits and standing orders over.

Can I get an overdraft with a joint bank account?

Yes, you can apply for an arranged overdraft on a joint bank account, but the other account holder must also agree to the overdraft.

Both of you will be responsible for the overdraft and repaying any money you owe. This could mean you’re responsible for paying off the other person’s debts.

However, if money is tight, having an overdraft can provide a temporary safety net if one of you is late paying your share.

What rules do banks have to follow on overdrafts?

Rules introduced in April 2020 by the Financial Conduct Authority (FCA) mean that banks are no longer allowed to charge you a fee for having an overdraft.

Instead, they can only charge a simple annual interest rate, without extra fees or charges.

This means you’ll be charged the same rate of interest whether you’re using an arranged or unarranged overdraft. And you won’t be charged a higher rate of interest if you go over your overdraft limit.

Another rule banks must follow is to show your available balance at ATMs without your overdraft. For example, if you’ve got an agreed £500 overdraft limit and have £300 in your account, your available balance would be shown as £300, not as £800.

Any amount that you’re overdrawn by must be shown as a negative amount, so if you were £300 into your overdraft, this would show on your balance as -£300.

What are the alternatives to overdrafts?

Overdrafts can be an expensive way to borrow money, so it’s worth considering other cheaper options.

If you want to borrow a larger amount and repay it over a longer period of time, a personal loan could be a good option. For example, you could borrow £5,000 over five years at a rate of less than 4% APR.

For borrowing smaller amounts in the short-term, interest-free credit cards can help you fund essential, planned and affordable purchases.

Even standard credit cards can be cheaper, at an average interest rate of around 18%, compared to a rate of nearly 40% that’s charged for most overdrafts.

And if you already have a credit card, you could look at a 0% balance transfer card to help you pay off your outstanding debt without paying interest.

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