The FCA’s 2020 overdraft reform simplified the charging structure. Headline interest rates rose at many banks, although the FCA expected the cost to fall or stay the same for most users. Understanding how charges work and how to compare them can save you money if you regularly use your overdraft.
How UK Banks Charge for Overdrafts (Post-2020 Rules)
Before April 2020, banks could charge a complex mix of:
- Daily fixed fees
- Monthly fees
- Percentage interest
- Higher ‘unarranged’ rates
Since April 2020, the FCA requires:
- A single annual interest rate for all overdraft borrowing
- No higher price for unarranged overdrafts than for arranged ones
- Clear comparability: banks must advertise a representative APR, and the FCA encourages showing the EAR too, so rates can be compared
Overdraft Rates — Major UK Banks (2026 Approximate)
| Bank | Arranged overdraft EAR |
|---|---|
| Monzo | 19% / 29% / 39% (by credit profile) |
| Starling | 15% / 25% / 35% (by credit profile) |
| First Direct | 39.9% |
| HSBC | 39.9% |
| Barclays | 35% |
| Lloyds | 29.9% (representative; Club Lloyds has £100 interest-free) |
| NatWest | 39.49% |
| Santander | 39.94% |
Note: Rates change and vary by account type. Check your bank’s current terms. Monzo and Starling using tiered rates based on credit profile is an exception to the flat-rate model.
Interest-Free Buffers
Several banks offer small interest-free overdraft buffers — particularly for student and graduate accounts:
| Account type | Interest-free buffer |
|---|---|
| Student accounts | Many are 0% while you study; limits vary by bank, and some go up to £3,000 |
| Graduate accounts | Often 0% for a fixed period after graduating; how long varies by bank |
| Nationwide FlexDirect | First £50 interest-free |
| First Direct 1st Account | £250 interest-free |
If you frequently dip into overdraft by small amounts, switching to an account with an interest-free buffer could remove the charges, as long as you stay within the buffer.
How to Calculate Your Overdraft Cost
EAR is a compounded annual rate, so the daily rate is not simply the EAR divided by 365. EAR to daily rate conversion:
Daily rate = (1 + EAR)^(1 ÷ 365) − 1
Example: £500 overdraft at 39.9% EAR: 1.399^(1 ÷ 365) − 1 = 0.092% a day, so £500 × 0.092% = about £0.46 per day → about £14 for 30 days (compounded)
Escaping the Overdraft Cycle
If you rely on your overdraft every month, these steps can break the cycle:
- Open a basic bank account (no overdraft facility) — use this for all spending to stop the overdraft growing
- Check if a 0% money transfer credit card is available: this lets you move the overdraft balance to a 0% interest card for an introductory period
- Consider a personal loan at a lower rate than your overdraft EAR — pay off the overdraft in one go and pay the loan back in fixed instalments
- Set a payback target — divide the overdraft by 12 and set that as a monthly savings target
- Get free advice if the overdraft is unmanageable alongside other debts
What Happens If You Cannot Repay the Overdraft?
See: What Happens If You Cannot Repay Your Overdraft?
How Overdraft Charges Affect Your Credit Score
Using an authorised overdraft within the agreed limit is unlikely to harm your credit score. However:
- Exceeding your authorised limit can be recorded as a missed payment on your credit file, particularly if you stay over it for weeks
- Repeated use at or near the limit, or rarely paying the overdraft off, could affect a mortgage lender’s decision, as each lender sets its own rules
- A default on an overdraft (usually after a formal default notice and three to six months of missed payments, though it varies by lender) is recorded on your credit file and stays there for six years from the default date
- The overdraft being sold to a debt collector is shown on your credit report, but it should not look like a second default
For mortgage purposes, lenders typically look at the last 3–6 months of bank statements. Every lender sets its own rules on overdraft use. An overdraft that is consistently at or near its limit, or is rarely paid off, could affect a lender’s decision.
Authorised vs Unauthorised Overdrafts: What Changed in 2020
Before April 2020, banks charged extremely high fees for unauthorised overdrafts, typically about £5 a day to borrow £100. This created a debt trap for people who accidentally exceeded their limit.
The FCA reformed overdraft pricing in April 2020, requiring:
- One simple annual interest rate for each overdraft, with unauthorised borrowing priced no higher than authorised
- No fixed daily or monthly fees for overdraft use
- Clear advertising in APR terms so customers can compare products
The FCA expected the cost of borrowing to go down or stay the same for most people, although headline interest rates rose. The major high-street banks now charge roughly 30% to 40% EAR on arranged overdraft borrowing, though some app banks set lower rates by credit profile. At 39.9% EAR, a £500 overdraft used for 30 days costs approximately £14.
Switching Banks and Your Overdraft
If you want to switch to a bank with lower overdraft charges:
- The Current Account Switch Service (CASS) takes 7 working days, and your new bank moves your existing direct debits and standing orders for you (payments set up in the final 7 working days are not moved)
- You need to agree any overdraft with your new bank before the switch. It may offer a facility to help pay off your existing overdraft, and if you cannot agree one you must make separate arrangements to repay the old overdraft before you switch
- Your new bank will offer an overdraft based on their own credit assessment of you; they may offer less, more, or a different rate than your current bank
- Check eligibility for new bank overdrafts before switching: some have soft search eligibility checkers, others require an application
Alternatives to Overdraft Borrowing
If you regularly rely on an overdraft to reach payday, the underlying issue is a cash flow gap between income and expenditure during the month. Addressing this prevents long-term overdraft debt accumulation:
0% purchase credit card, if you have a reasonable credit score, a 0% purchase card lets you put essential spending on credit at no interest for an introductory period. This is cheaper than overdraft interest if managed correctly.
Credit union loans: credit unions offer small loans, and the interest they can charge is capped at 3% a month (42.6% APR) outside Northern Ireland, so compare the rate with what your overdraft costs. They are open to members (each has its own common bond, often based on where you live or work), and may be more willing to lend if you have a low income or little borrowing history. Some will lend once you have shown you can save regularly, which may mean saving for a few weeks before you can apply.
Salary advance / earned wage access: some employers offer salary advance schemes that allow you to access earned wages before payday, which may reduce how often you need an overdraft. Some schemes charge a fee, so check with your employer whether this is available and what it costs.
Emergency savings buffer: a small emergency fund held in an instant-access savings account can act as a buffer. This acts as a buffer for unexpected expenses that would otherwise push you into overdraft. Building this gradually (even £10/week) reduces overdraft dependency over time.