How much does an overdraft cost?

Since April 2020, most overdrafts charge a single interest rate (typically 35-40% EAR or around 3% per month). On a £1,000 overdraft, this costs roughly £30/month in interest. Some banks offer interest-free buffers of £250-£500. Unarranged overdrafts now cost the same as arranged (no extra fees).

Does using an overdraft affect my credit score?

Using an arranged overdraft within your limit typically has no negative impact. However, regularly being in your overdraft (especially near the limit) can be seen negatively by lenders. Unarranged overdraft use or having payments refused can damage your credit score.

Can I get an overdraft with bad credit?

It is harder but not impossible. Your bank may offer a small overdraft on your existing account. Some banks offer guaranteed overdrafts on basic accounts. Credit-builder accounts are another option. The interest rate may be higher, and the limit lower.

Overdraft Guide UK — How They Work, Costs + Alternatives | PocketWise

An overdraft allows you to spend more than you have in your current account — essentially short-term borrowing from your bank. While convenient, overdrafts can be expensive if used regularly. Understanding how they work helps you use them wisely or avoid them altogether.

How Overdrafts Work

Feature	Detail
What it is	Permission to go into a negative balance
How it is repaid	Automatically when money comes in
Interest	Charged daily on the overdrawn balance
Typical rate	35–40% EAR (around 3%/month)
Credit check	Required to arrange
Impact on credit file	Reported monthly; heavy use can affect score

Types of Overdraft

Type	Detail	Cost
Arranged (authorised)	Pre-agreed limit with your bank	Interest only (no extra fees since 2020)
Unarranged (unauthorised)	Going overdrawn without permission OR exceeding your limit	Same interest rate as arranged (since 2020) but refused payments may incur fees
Interest-free buffer	First £0–£500 with no interest (varies by bank)	Free

Overdraft Costs Compared

Interest Rates by Bank

Bank	EAR	Monthly Cost on £1,000
First Direct	39.9%	~£33
Monzo	39.9%	~£33
Starling	15–35%	£12–£29
HSBC	39.9%	~£33
NatWest	39.49%	~£33
Nationwide	39.9%	~£33
Lloyds	39.9%	~£33

Interest-Free Buffers

Bank	Interest-Free Amount
First Direct	£250
M&S Bank	£100
Nationwide FlexDirect	None (but competitive rate)
Starling	None
Monzo	None

How to Get an Overdraft

Step	Detail
1	Check if your current account offers overdrafts
2	Apply online, via app, or in branch
3	Bank runs credit check
4	If approved, limit is set (£100–£10,000+ depending on circumstances)
5	Overdraft is available immediately

What Banks Consider

Factor	Impact
Credit score	Higher score = higher limit
Income	Regular income helps
Account history	Good management with this bank helps
Existing debt	May reduce what is offered
Previous overdraft use	Good history helps

Overdraft vs Other Borrowing

Feature	Overdraft	Credit Card	Personal Loan
Interest rate	35–40%	0–29.9% (purchases)	3–15%
Flexibility	Very high	High	Fixed repayments
Minimum repayment	None (auto when money comes in)	Minimum payment monthly	Fixed monthly
Best for	Short-term emergencies	Purchases (pay off monthly)	Planned larger expenses
Risk	Easy to stay overdrawn	Easy to build debt	Fixed commitment

Problems with Overdrafts

Problem	Why It Matters
Expensive	39.9% EAR is high-cost borrowing
Too convenient	Easy to dip in and stay there
Automatic repayment	Income goes straight to repaying overdraft
Cycle of debt	Hard to escape once reliant
Credit impact	Heavy use looks bad to lenders

How to Reduce or Clear Your Overdraft

Step-by-Step Plan

Step	Action
1	Check the total — know how much you owe
2	Set a target — reduce by £50–£100/month
3	Request a gradual reduction — ask your bank to lower the limit as you pay it down
4	Automate savings — transfer a fixed amount to savings immediately when paid
5	Use the 50/30/20 budget — prioritise debt repayment

Options to Clear Faster

Option	How It Helps
Balance transfer card	0% interest for 12–29 months (watch fees)
Personal loan	Lower interest rate; fixed repayments
Savings	Use savings to clear (overdraft interest > savings interest)
Increase income	Overtime, side jobs, selling items
Cut spending	Redirect savings to overdraft

Overdraft Alternatives

Alternative	Best For
Emergency fund	Preventing need for overdraft
0% credit card	Short-term borrowing at no cost
Personal loan	Planned expenses
Salary advance apps	Very short-term (check costs)
Family/friends	Interest-free (if possible)
Credit union loan	Lower rates than overdraft

If You Are Struggling

Action	Detail
Contact your bank	They may offer a repayment plan or fee freeze
Basic bank account	Cannot go overdrawn; prevents further issues
Debt advice	Free help from StepChange, Citizens Advice
Breathing space	Government scheme for debt respite

For more on managing debt, see our debt repayment strategies and debt management plan guide.