The FCA’s 2020 overdraft reform simplified the charging structure — but many banks used the change as cover to raise their EAR significantly. 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 (e.g., £1–£3 per day)
- Monthly fees
- Percentage interest
- Higher ‘unarranged’ rates
Since April 2020, the FCA requires:
- A single annual interest rate (EAR) for all overdraft borrowing
- No distinction in price between arranged and unarranged overdrafts
- Clear comparability — all banks use EAR 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 | 39.9% |
| NatWest | 39.9% |
| Santander | 39.9% |
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 (most banks) | £1,000–£3,000 interest-free |
| Graduate accounts | Reducing buffer over 2–3 years |
| Nationwide FlexDirect (1st year) | Up to £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 eliminate all charges.
How to Calculate Your Overdraft Cost
EAR to daily rate conversion:
Daily cost = (Balance × EAR) ÷ 365
Example: £500 overdraft at 39.9% EAR: (£500 × 0.399) ÷ 365 = £0.55 per day → £16.40 per month
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 typically 12–24 months
- 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
An authorised overdraft that you manage within the agreed limit does not harm your credit score — it is treated like any other credit facility. However:
- Exceeding your authorised limit is typically recorded as a missed or late payment on your credit file
- Repeated use at or near the limit signals to lenders that you are consistently reliant on overdraft borrowing, which can affect affordability assessments
- A formal default notice on an overdraft (usually triggered after 3–6 months of arrears) is recorded on your credit file and remains there for 6 years
- The overdraft being sold to a debt collector creates an additional record
For mortgage purposes, lenders typically look at the last 3–6 months of bank statements. An overdraft that is used regularly and repaid fully each month is generally acceptable. An overdraft that is consistently at or near its limit, or that shows as overdrawn at the start and end of every month, suggests to lenders that you are living beyond your means — this can affect how much they are willing to lend.
Authorised vs Unauthorised Overdrafts: What Changed in 2020
Before April 2020, banks charged extremely high fees for unauthorised overdrafts — sometimes equivalent to APRs of over 3,000% through fixed daily fees. This created a debt trap for people who accidentally exceeded their limit.
The FCA reformed overdraft pricing in April 2020, requiring:
- A single interest rate to apply to all overdraft borrowing (authorised and unauthorised)
- No fixed daily or monthly fees for overdraft use
- Clear advertising in APR terms so customers can compare products
This brought overdraft costs in line with other forms of consumer credit. The major high-street banks now charge between 19.9% and 39.9% EAR on overdraft borrowing. At 39.9% EAR, a £500 overdraft used for a full month costs approximately £16.
Switching Banks and Your Overdraft
If you want to switch to a bank with lower overdraft charges:
- The Current Account Switch Service (CASS) makes full switches within 7 working days, with all direct debits and standing orders transferred automatically
- Your old bank must clear your overdraft balance before the switch completes — you will need to pay this off or arrange transfer separately
- 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 (typically 12–24 months). This is cheaper than overdraft interest if managed correctly.
Credit union loans — credit unions often offer small, short-term loans at rates significantly lower than overdraft interest. They are open to members (usually based on where you live or work) and do not require strong credit. Many offer a “Save as You Borrow” product where a portion of your repayment goes into a savings account, building a financial buffer.
Salary advance / earned wage access — some employers offer salary advance schemes that allow you to access earned wages before payday, avoiding the need for overdraft borrowing entirely. Check with your employer whether this is available.
Emergency savings buffer — the most effective long-term solution is a small emergency fund (even £200–£300) held in an instant-access savings account. 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.