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Overdraft debt

Getting or increasing an overdraft - things to consider

Getting or increasing an overdraft can have risks. It is an expensive way to borrow and there may be cheaper options.

What is an overdraft?

An overdraft is a facility attached to your current account that lets you take money out when there are no funds in it.

You may be thinking about:

  • Getting an overdraft for the first time
  • Asking your bank to increase your limit so you can borrow more

Using an overdraft means you borrow money from the bank. If you do borrow, make sure to do it in the cheapest way possible.

Do I really need an overdraft?

Most banks offer an overdraft facility along with their current accounts.

A simple rule is to only use your overdraft for:

  • An emergency fund, or
  • A short-term borrowing option

Ask yourself these questions:

  • Do you need an overdraft?
  • Is there any way you can avoid borrowing?
  • Do you have savings you could use instead?

Savings are a cheaper way to top up your money, if you have them.

The interest you make on savings is less than what you are charged on overdraft.

How have overdrafts changed?

Banks changed the way they charge for overdraft in 2020. It is now a flat rate of around 40% EAR.

EAR stands for ‘equivalent annual rate’. It is the interest rate charged over a year, if your account was to remain overdrawn.

This change makes your overdraft cheaper if you:

  • Do not use your overdraft often
  • Use your overdraft in small amounts

The Financial Conduct Authority (FCA) says lenders should make sure customers are not worse off because of the changes.

Overdrafts are still expensive. Make sure you look at other options.

What are my alternatives to getting or increasing an overdraft?

Any time you borrow money you should check you are paying the least amount in interest and fees.

Other options to an overdraft include:

Comparison sites can show you:

  • Interest rates on different types of debt
  • The best and cheapest way to borrow for your needs

I do not have a perfect credit rating. Can I still get an overdraft?

Your credit rating can affect if a bank will offer you an overdraft.

You may find it hard to get or increase an overdraft if your credit is poor.

Find out more about credit for bad credit scores.

Can I rely on my overdraft?

Your bank can withdraw or reduce your overdraft at any time, without notice.

This means it is not a reliable way to borrow.

More reliable forms of credit are:

  • A credit card
  • A personal loan

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What is the difference between an arranged and unarranged overdraft?

Arranged overdraft

An arranged overdraft is one you agree in advance with your bank.

It has agreed interest and fees.

Unarranged overdraft

An unarranged overdraft is when you go over agreed limit.

Your bank charges you higher interest and fees if you go into an unarranged overdraft. Try to avoid this.

You may need help with debts if:

  • You depend on your overdraft
  • You regularly enter your unarranged overdraft

The 2020 changes to overdrafts mean the end of unarranged overdrafts. Banks cannot increase interest and fees once you reach your overdraft limit.

Does using my overdraft affect my credit rating?

Your credit rating can be affected if:

  • You often go over your overdraft limit
  • You owe too much on your overdraft

This can make it harder to get a loan, mortgage, credit card or other form of borrowing.

How can I reduce the amount I use my overdraft?

Keep a careful eye on your account balance

  • Download your bank’s app on your phone
  • Set up text alerts for low balance
  • Use phone banking if you need to

This helps you know when:

  • You are close to using your overdraft, or
  • You are in danger of reaching the limit

The FCA estimates people are 24% less likely to receive unarranged overdraft charges if they use a mobile banking app and text alert service.

Stick to your budget

Start by creating a thorough and realistic budget. This helps you:

  • Predict your spending
  • Know if you are close to using your overdraft or reaching its limit

Does having an overdraft mean I need to read letters from my bank?

It is good practice to read all the letters you get from the bank. Even if you:

  • Assume they are bank statements or,
  • Find bank letters stressful

But your bank may write to you about your overdraft or other important alerts.

Can I switch banks if I have an overdraft?

Yes, you may be able to switch banks if you have an overdraft. But in some cases, it may not be possible.

Such as, if you are wanting to switch to a basic bank account. This type of bank account does not accommodate overdrafts.

Use the Current Account Switch Service.

Need help with overdraft debt?

Get free debt advice if you are finding it hard to deal with money and debt.

We can:

  • Help you set up a budget
  • Look at your financial situation
  • Recommend possible debt solutions