Understanding your bank overdraft
Overdrafts look like a handy safety net, but they are one of the most expensive ways to borrow. This guide explains how overdrafts really work, what happens if you go over the limit, and how to get out of the overdraft trap.
Many people treat their overdraft as part of their normal balance. The number is just there on the app, so it is easy to forget that every pound you dip into the red is borrowed money. Knowing how overdrafts work can save you a lot of stress and charges.
Is an overdraft the same as a loan
Yes. An overdraft is a type of short term credit linked to your current account. When you go below £0, the bank is lending you money.
Key differences from a normal loan:
- You do not receive a lump sum at the start.
- You can dip in and out at any time, up to your limit.
- Interest is usually charged daily on whatever you have used.
Because it feels automatic and flexible, it is easy to forget it is still debt.
What is the difference between arranged and unarranged overdrafts
Arranged overdraft
- You and the bank agree a limit in advance, for example £500.
- You can usually spend up to that amount beyond £0.
- Interest is charged, but extra fees are less likely as long as you stay within the limit.
Unarranged overdraft
- You go beyond your agreed limit or below £0 without any limit in place.
- Payments may be refused or allowed at the bank’s discretion.
- This is normally more expensive and can lead to extra charges or negative marks on your record.
If you are often in an unarranged overdraft, it is a red flag that your budget is under real pressure.
Why are overdrafts so expensive
Most major UK banks charge a single overdraft interest rate on personal current accounts. For many people this is around credit card level or higher.
Reasons overdrafts can be costly:
- Interest is applied to every day you are overdrawn.
- Being permanently near the limit means you are always paying interest.
- If you go over the limit, extra charges can be added.
An overdraft is designed as an emergency buffer, not a long term way to fund everyday life.
What happens if I keep living in my overdraft
If your balance sits below £0 most of the time, several things can happen:
- You pay interest every single day.
- The bank may reduce or remove your arranged limit if they think it is no longer affordable.
- Regular bills like direct debits might start to be refused, which can trigger fees from companies you owe.
- It can be a warning sign to other lenders that your budget is tight.
Long term, using an overdraft as extra income usually means you are one unexpected bill away from serious difficulty.
Can my bank just take money from my income to clear the overdraft
Yes, they can, within limits.
Banks have what is called a right of set off. If you have money coming into an overdrawn current account, they can use it to reduce what you owe.
This usually looks like:
- Your salary goes in.
- Your overdraft reduces automatically.
- Whatever is left is what you can spend.
If this leaves you unable to pay rent or essentials, you should contact the bank straight away and explain. They may be able to:
- Move you to a basic account without overdraft,
- Ring fence some income for essentials,
- Agree a separate repayment plan for what you owe.
Does using an overdraft affect my credit score
It can do.
Your overdraft limit and usage may appear on your credit file. Lenders can see:
- Whether you are regularly at or near your limit.
- Whether you go over your limit or into unarranged overdraft.
Occasional, small use that you clear quickly is unlikely to be a big problem. Constant reliance on an overdraft can make you look riskier, especially when applying for other credit or a mortgage.
What happens if I go over my overdraft limit
If you spend beyond your arranged limit:
- The bank can decline payments (for example, card transactions or direct debits).
- Some payments may still go through, but you move into unarranged overdraft.
- You may be charged extra fees and a higher rate.
If this happens repeatedly, the bank may:
- Reduce or remove your overdraft,
- Flag your account as being in persistent difficulty,
- Ask you to repay what you owe over a shorter period.
If you know a big payment is going to push you over, contact the bank in advance. They are more likely to help if you speak before the problem rather than after.
Should I use an overdraft or a credit card for emergencies
Neither is ideal for long term borrowing, but in practice people use both.
An overdraft might be simpler for:
- Short term, one off slips, like a bill mis-timed between paydays.
A credit card may be safer for:
- Spending you plan to repay over a few months, as it is easier to see the balance and structure repayments.
The real question is: can you afford to repay quickly. If not, it may be time to get help with your budget rather than relying on either.
How can I start to get out of overdraft debt
If you are stuck in the red most of the time, there are practical steps you can take:
-
Stop treating the limit as part of your money
Look at your balance without the overdraft. That tells you what you genuinely have. -
Add up interest and fees for the last few months
Seeing the cost in pounds often makes it clear why getting out is worth the effort. -
Talk to your bank
You can ask about:- Freezing or reducing interest,
- Setting a lower limit and gradually stepping it down,
- Moving the overdraft into a separate, structured repayment.
-
Create a small buffer
Aim first to get back to £0 and then to build a £100–£200 positive buffer so that you do not slip straight back. -
Get free debt advice if needed
If you have multiple debts and are using overdrafts to plug gaps, a charity like StepChange, National Debtline or Citizens Advice can help you build a proper plan.
When is it worth asking for help
You should consider getting help if:
- Your wages go in and are swallowed by the overdraft straight away.
- You are regularly using other credit to get back to £0.
- You are ignoring letters or messages from the bank because they make you anxious.
These are all common situations for people contacting debt support charities. You will not be the first or the worst they have seen.
Key points to remember
- An overdraft is a loan linked to your current account, not free extra money.
- Staying in the red most of the time is a sign your budget needs attention.
- Banks can and do use incoming money to reduce overdrafts, but you have the right to ask for help.
- The earlier you act, the easier it is to turn an overdraft from a permanent burden back into what it was meant to be – a short term safety net.
