Overdraft basics

About overdrafts

The information in this guide was last updated on 26/02/2014

Overdrafts can be useful if you need money to tide you over in the short term. Read our guide to how they work, including overdraft fees.

An overdraft is a service provided by a building society or bank that allows you to make withdrawals, write cheques and make payments when you don’t have enough money in your account to cover them in the short-term. As it's a means of borrowing money you usually have to pay fees or interest for using it.

There are two types of overdraft:

  • Arranged overdraft: this is an amount agreed with your bank or building society in advance. The agreement will cover a limited amount and be reviewed on a regular basis.
  • Unarranged overdraft: this is when you go overdrawn by more than your arranged overdraft limit or where you haven't agreed an overdraft limit and your balance goes below £0. Unarranged overdrafts can incur higher fees than arranged overdrafts. This can also affect your credit rating and any overdraft review your current account provider carries out.

What can I use an overdraft for?

Overdrafts can be useful for short-term borrowing, for example, to tide you over until payday. Their advantage is that they’re flexible and that you can dip into them at any time while your agreement lasts. You can also repay your overdraft whenever you like, without any early repayment charges.

Some overdrafts charge interest at a variable rate. So if you want to know exactly what you’re going to pay back, you might want to look at some fixed rate options. 

How can I get an arranged overdraft?

You’ll need to apply to your current account provider. Bear in mind that they’re not under any obligation to give you an arranged overdraft. If you don’t have an arranged overdraft and write cheques for more than you have in your account, the cheques may be returned (bounce), and you’ll be charged.

How much does an overdraft cost?

It depends on how overdrawn you are and on the specific policies of your building society or bank. 

These may charge:

  • a monthly management fee
  • for every cheque and transaction you make while you’re overdrawn
  • only on the overdrawn balance.

Banks and building societies may also charge daily, quarterly or annually. But whatever method they use, they must tell you in advance:

  • what the charges are
  • what the interest rates are
  • how and when interest will be taken from your account.

Your bank and building society may also charge you for setting up an overdraft facility. The amount of overdraft charges you will incur will depend on how much you use your overdraft.

How much can I be overdrawn by?

It will base your overdraft limit on your individual financial circumstances, which will include an assessment of your:

  • incomings
  • credit score
  • employment status
  • children and other dependents
  • marital status.

Can the bank change my overdraft?

Your bank or building society might change your overdraft arrangements if your situation changes. They also have the right to withdraw your arranged overdraft or demand you pay it back in full at any time.

Overdraft glossary