This guide is part of the Payments and Transactions hub, covering overdrafts, direct debits, standing orders, and payment methods.
Going over your overdraft limit — whether into unarranged territory or beyond your arranged limit — triggers a chain of consequences that can escalate quickly if left unaddressed. Since the FCA’s 2020 rule changes, the most severe fees have been banned, but the financial damage from refused payments and credit file entries can still be significant.
This guide explains exactly what happens, what the costs are, and what to do to limit the fallout.
What Changed in 2020
In April 2020, the FCA introduced rules that fundamentally changed how overdraft charges work:
| Before 2020 | After 2020 |
|---|---|
| Higher interest rate for unarranged overdraft | Same rate applies to arranged and unarranged |
| Daily fees common (e.g., £5/day) | Daily fees banned |
| Complex, opaque charging structures | Single annual interest rate (EAR) required |
| Unarranged overdraft often most expensive borrowing available | Still typically 35–40% EAR, but comparable to arranged rate |
The practical effect is that going into unarranged overdraft is no longer instantly catastrophic in the way it once was — but the underlying interest rate is still high, and the consequences of refused payments remain real.
What Happens When You Exceed Your Limit
Immediate Bank Response
When you exceed your overdraft limit, your bank has discretion over what to do with incoming payment requests. Some will honour a payment anyway (using internal leeway), especially if you are only a small amount over. Others will refuse it outright.
| Bank Action | What It Means |
|---|---|
| Honours the payment | You go into unarranged overdraft; interest charged at the standard rate |
| Refuses the payment | Direct debit, standing order, or card payment is returned unpaid |
| Contacts you | Bank notifies you by app alert, text, or letter |
| Flags account for review | Overdraft limit may be reassessed |
Refused Payments and the Knock-On Effects
A refused direct debit or standing order does not just affect your bank account — it can ripple out to the payees. If a mortgage, rent, utility, or insurance direct debit bounces, the consequences can be serious. For a full explanation of what happens when a direct debit fails, including how re-presentation works, see the guide to what happens if a direct debit fails.
| Refused Payment | Potential Consequence |
|---|---|
| Mortgage direct debit | Arrears recorded; lender contact |
| Rent payment | Landlord late payment notice |
| Utility bill | Supplier may charge missed payment fee |
| Insurance premium | Policy could lapse, leaving you uninsured |
| Loan or credit card | Late payment fee; credit file marker |
| Council tax | Risk of enforcement action |
The key risk here is not the bank charge — it is the missed payment fees and credit file markers generated at the other end.
Interest Costs: What You Are Actually Paying
Most banks charge between 35% and 40% EAR (Equivalent Annual Rate) on overdraft balances. This applies to both arranged and unarranged amounts since 2020.
| Overdrawn Amount | Monthly Interest at 39.9% EAR |
|---|---|
| £100 | ~£3.30 |
| £500 | ~£16.50 |
| £1,000 | ~£33.00 |
| £2,000 | ~£66.00 |
For comparison, a personal loan of £1,000 at 15% APR would cost around £12.50/month in interest — less than half the cost of the same balance in overdraft. If you regularly carry an overdraft balance, see the full overdraft guide for a cost comparison of alternatives and how to switch.
Overdraft vs Other Borrowing
| Product | Typical Rate |
|---|---|
| Arranged overdraft | 35–40% EAR |
| Credit card (purchase) | 20–30% APR |
| Personal loan (£1,000+) | 7–15% APR (representative) |
| 0% money transfer card | 0% for introductory period |
| Credit union loan | 12–42% APR |
Credit Score Impact
Exceeding your overdraft has a tiered impact on your credit file depending on frequency and severity:
| Situation | Credit Impact |
|---|---|
| Occasional slight exceedance, resolved quickly | Minor — may not be reported |
| Regular pattern of exceedance | Moderate — visible to lenders |
| Payments being refused and bouncing | Significant — missed payment markers |
| Overdraft persistently at or over limit | Severe — lenders treat as a risk signal |
Credit reference agencies (Experian, Equifax, TransUnion) record your overdraft usage. Even if no payment is missed, consistently using your full overdraft limit is a negative signal to mortgage and loan lenders, who treat high credit utilisation as a risk factor.
What to Do Immediately
Step 1: Check Your Exact Position
Log into your bank app or online banking. Find out:
- Your current balance (including any unarranged overdraft amount)
- What payments are pending or due in the next 7 days
- Whether any direct debits have already been refused
Step 2: Stop the Bleed
Pause any non-essential card spending immediately. If you have multiple accounts, check whether you can transfer money across. Cancel or defer any discretionary direct debits you can do without for this month.
For context on the difference between direct debits (which a company controls the amount and date of) and standing orders (which you control), see the guide to direct debits vs standing orders.
Step 3: Contact Your Bank
Call or message your bank the same day. Explain the situation honestly. Banks have hardship and vulnerability teams, and many will:
| Request | Likely Response |
|---|---|
| Temporary overdraft extension | Often possible for short periods |
| Waiver of any charges | Often granted for a first occurrence |
| Payment arrangement | Available if you are in persistent difficulty |
| Overdraft increase | Possible if you have a clean recent history |
Most banks prefer to help you manage the situation rather than let it escalate. Being proactive significantly improves outcomes.
Step 4: Notify Any Affected Payees
If a direct debit has already been refused, contact the payee yourself — before they chase you. Insurance companies and lenders in particular may have automatic processes that treat a missed payment as a default. Getting ahead of this prevents unnecessary late payment fees and credit file entries.
Planning to Clear the Overdraft
If you find yourself regularly in overdraft, the underlying issue is usually a structural gap between income and outgoings — and the overdraft is masking it. The interest cost means the gap is slowly widening.
A Worked Clearing Plan
| Month | Starting Balance | Interest (39.9% EAR) | Payment | Remaining |
|---|---|---|---|---|
| 1 | £1,000 | £33 | £500 | £533 |
| 2 | £533 | £18 | £500 | £51 |
| 3 | £51 | £2 | £53 | £0 |
Once cleared, continue putting the same amount aside monthly to build a buffer. A £500–£1,000 emergency buffer in a separate account means a one-off shortfall never forces you back into overdraft.
Getting Free Help
If the overdraft is persistent and you cannot see a way to clear it, free debt advice services can help negotiate with your bank and create a structured plan:
| Service | What They Offer |
|---|---|
| StepChange (stepchange.org) | Free debt advice, repayment plans |
| National Debtline (nationaldebtline.org) | Free advice by phone and online |
| Citizens Advice | Local in-person and online support |
| Breathing Space Scheme | 60-day protection from creditor action while seeking advice |
The Breathing Space Scheme gives you 60 days during which creditors — including your bank — cannot add interest, charges, or take enforcement action, giving you time to get advice and make a plan.
Summary
- Since 2020, banks cannot charge more for unarranged overdrafts than arranged ones — but the rate is still typically 35–40% EAR
- Refused payments are the most dangerous consequence — they can generate missed payment markers and fees at the payee’s end
- Credit score impact ranges from minor (one-off) to severe (persistent pattern with bounced payments)
- Act the same day: check your position, stop non-essential spending, contact your bank
- Alternatives are cheaper: personal loans and 0% money transfer cards cost significantly less than carrying an ongoing overdraft balance
- Free help is available from StepChange and National Debtline if the situation is ongoing