Current accounts with overdrafts

Most current accounts come with an overdraft facility these days, either discretionary or already included in the package.

But should you use it? How much is it going to cost you? How are you supposed to understand all those complicated fees? We’ve looked into it so that you don’t have to.

What is an overdraft?

An overdraft is a feature of your current account that allows you to continue spending even once you’ve exhausted all your available funds.

Since you’re effectively borrowing money, you’ll usually be charged interest and/or a fee for it. Overdrafts can turn out quite expensive, so you should only use yours in case of emergency. However, they can be handy if you need just a few extra quid to make it to the end of the month.

Most full current accounts come with an overdraft option included or allow you to apply for one.

Arranged vs unarranged overdrafts

There are two types of overdrafts:

• Arranged overdrafts. That’s when you apply and are approved for an overdraft by your bank. You’ll be able to borrow up to a set limit. Arranged overdrafts are less expensive than unarranged overdrafts, but still not free (more on this below).
• Unarranged overdrafts. That’s when you haven’t agreed to an overdraft with your bank and still overspend, or when you spend more than your overdraft limit. Unarranged overdrafts come with a scary series of fees, so you really, really want to avoid them.

How to apply for an overdraft

Most current accounts will ask you if you’d like an overdraft facility when you initially apply. You can get it then, or apply for one later on.

You can typically apply for an overdraft online or from your banking app. You’ll be asked what is the arranged overdraft limit you’d like and will usually be credit checked. If you pass (the credit limit you’re approved for may be lower than what you asked for), you’ll then be able to use your arranged overdraft.

Overdraft fees

As we said, before using your overdraft, you should make sure you’re fully aware of how much it’s going to cost you. There are many different fees to take into account and they can quickly add up to a fairly significant sum.

• Fees for accessing an overdraft facility. This isn’t super common, but with some banks, you’ll be charged just for having an overdraft facility on your account, even if you don’t use it.
• Fees for arranged overdrafts. Arranged overdrafts are typically charged a daily or a monthly fee and/or an interest rate. Things are especially tricky with fixed fees because you could end up paying quite a lot even if you’ve only gone overdrawn a few pounds.
• Fees for unarranged overdrafts. According to the Financial Conduct Authority (FCA), “in some cases, unarranged overdraft fees can be more than ten times as high as fees for payday loans”. Again, they may include daily or monthly fixed fees, and even a transaction fee that’s charged every time you make a payment with your debit card or pay a direct debit while you’re overdrawn.

The FCA has announced new overdraft rules that will be enforceable from 6 April 2020. After that, banks won’t be allowed to charge more for unarranged overdrafts than for arranged ones or to charge fixed fees (only an annual interest rate). But until then, unfortunately we’re stuck with complex fee structures that would frustrate any sensible human being, so make sure you know what you’re getting yourself into if you want to use your overdraft.

Is a current account with an overdraft a good idea?

In theory, there’s no harm in at least applying for an overdraft facility and having it on your bank account. It can be a life saver if something happens and you have to deal with an emergency. However, if you do it, you need to be aware of the catches:

• It’s an expensive form of borrowing. Yeah, we know, we’ve said it already. But hey, just in case you forgot.
• Different kinds of fees usually apply. They can pile up quickly, so you need to read the terms and conditions carefully.
• Be especially careful if you have more than one current account. If you spread your money between different accounts, you may accidentally end up using your overdraft even if you don’t actually need it.

Ultimately, it all comes down to how much your bank charges. There are current accounts out there offering decently priced overdrafts that can be really helpful if you need a bit of extra cash at times.

Can you switch current accounts with an overdraft?

Yes, you can. Having an overdraft won’t stop CASS (the current account switching scheme) from doing its thing and transferring your direct debits and payments to your new bank while closing your old account. If you had an overdraft with your old bank but weren’t using it, you don’t have to do anything except apply for an overdraft with your new bank if you still want it.

Things are a tad more complicated if you were using your overdraft and your old account was in debt. You have two main options:

• See if your new bank will accept your overdraft. If it does, you’ll be able to transfer it directly from your old account. Just make sure you’re not getting yourself a worse deal.
• Pay off your overdraft. If your new bank doesn’t agree to transfer your old overdraft, you’ll have to pay it off. Get in touch with your old bank to agree on how to do so. If money is tight, keep in mind that your new bank may still be willing to offer you an overdraft even if it doesn’t allow you to transfer your old one (it’s worth asking/applying).

Alternatives to overdrafts

Overdrafts are definitely not your only option when it comes to borrowing:

• Credit cards. If you often end up overspending one month only to make up for it the following one, getting a credit card is much better than dipping into your overdraft. As long as you clear your balance in full every month, you won’t be charged any interest.
• Personal loans. If you already know you’re going to have to borrow money in the near future, or are looking to fund a medium-to-long-term project, there’s really no point in relying on your overdraft. A personal loan will probably be more suitable for your needs.

Finally, if you find yourself overusing your overdraft, maybe the time has come to do a bit of budgeting and reorganise your finances. If it sounds like a daunting task, why not try a budgeting app? For example, Yolt and Money Dashboard are both free and do the job more than adequately.

Frequently asked questions

• What if I don't want an overdraft at all?

  Look for an account that only gives you one if you apply for it (there are plenty). But make sure you’re aware of what happens if you overspend – you’re usually charged a fee if a payment is refused due to lack of funds.

• Will using an overdraft impact your credit score?

  No, as long as you pay it back monthly. You can find out more on this in our dedicated guide.