An overdraft is a facility attached to your current account that allows you to spend more money than you actually have, up to an agreed limit. It is one of the most commonly used — and commonly misunderstood — forms of short-term borrowing in the UK.
How does an overdraft work?
When you have an overdraft facility, your bank allows your account balance to go below zero, up to an agreed limit. For example, with a £500 overdraft limit, your balance could go as low as minus £500 before you would be unable to spend further. Unlike a loan, there is no fixed repayment schedule — you repay the overdraft whenever money goes back into your account, such as your next salary payment.
Arranged vs unarranged overdrafts
An arranged overdraft (also called an authorised overdraft) is one you have agreed with your bank in advance, with a set limit and known interest rate. An unarranged overdraft (or unauthorised overdraft) happens when you spend beyond your arranged limit, or have no arranged overdraft and your balance still goes negative — for example, if a direct debit is taken when you have insufficient funds. Unarranged overdrafts are generally far more expensive and can also result in declined payments and additional fees.
How is overdraft interest charged?
Since April 2020, UK regulation requires banks to charge a single annual interest rate (APR) on overdrafts, replacing the previous system of daily and monthly fees that made costs difficult to compare between providers. Overdraft APRs typically range from around 19% to 40% or more, depending on the bank — meaning overdrafts can be one of the more expensive ways to borrow, often costing more than a typical credit card or personal loan.
Interest is usually charged daily on the amount you are overdrawn, calculated and added to your account, though the exact method varies between providers. Always check your bank's specific terms, as the difference between providers can be substantial.
How does an overdraft affect your credit score?
Using an arranged overdraft responsibly — staying within your limit and clearing the balance regularly — does not generally harm your credit score and can even be viewed positively as evidence of managing credit. However, regularly maxing out your overdraft, going into an unarranged overdraft, or struggling to clear the balance can be viewed negatively by lenders and may affect your credit score. See our guide to what affects your credit score for more detail.
Should you use an overdraft?
An overdraft can be useful as a short-term buffer for occasional, brief cash flow gaps — for example, a bill arriving a few days before your salary. It is generally not well-suited as a long-term source of borrowing due to the relatively high interest rates compared to other credit options. If you find yourself relying on your overdraft for extended periods, it is worth reviewing your budget — see our guide to budgeting your salary — or considering whether a lower-cost form of credit, such as a 0% purchase credit card, might be more appropriate for planned spending.
How to reduce reliance on an overdraft
Building a small emergency fund — even £500 to £1,000 — can remove the need to dip into an overdraft for unexpected costs. See our guide to building an emergency fund for a practical approach. Reviewing your direct debits and ensuring they align with your pay dates can also help avoid accidentally slipping into an unarranged overdraft when a payment is taken before your salary arrives.