Best bank accounts for overdrafts

How does an overdraft work?

An overdraft is a credit facility that allows you to borrow more money than you have in your current account.

Previously, there were two types of overdraft, and these carried different interest rates and fees:

Since 6 April 2020 banks have not been allowed to charge more for unarranged overdrafts than for arranged overdrafts. Banks are also banned from charging daily or monthly overdraft fees.

However, a handful of banks will still impose a fixed fee if there aren't enough funds in your account and a payment (eg a direct debit, cheque, or standing order) bounces.

For example, Virgin Money charges £4 per unpaid transaction (up to a maximum charge of £20 per month) and NatWest Group charges £2.15 (it won't charge you more than £19.40 per month). 

Banks with cheap or free overdrafts

Banks and building societies changed their overdraft structure to comply with new Financial Conduct Authority (FCA) rules on overdrafts from April 2020.

Many lenders are charging customers as much as 39.9% AER, but there are still better deals available if you think you'll need to use an overdraft from time to time.

This table lists the current accounts with the cheapest overdrafts based on a scenario of borrowing £500 for seven days (excluding accounts reserved for private banking customers).

Some banks offer interest-free 'buffers', which means you don't face any charges if you borrow up to this amount. These can be generous, but be warned you may face hefty charges thereafter:

• Go further: the Money Helper bank account fees and charges tool can help you compare current accounts offered by most banks based on what they charge for different services and facilities. 

The best banks for overdrafts in detail

Starling 15% EAR overdraft - if your credit rating is excellent

Mobile and online-only bank Starling offers the cheapest overdraft on the market, but only if you have an excellent credit score.

Starling previously offered a flat rate of 15% to all customers but, since 1 April 2020, overdrafts have been charged at 15%, 25% or 35% EAR dependent on your credit score.

This approach means that different customers are offered different interest rates, with Starling Bank estimating how much of a risk there is that customers won't be able to pay back what they've borrowed.

For customers who now pay 25%, overdraft charges for borrowing £500 for seven days increased from £1.35 to £2.16, while those paying the highest rate of 35% face charges of £2.92.

The maximum overdraft is £5,000, subject to status.

Use the bank's eligibilty tool before applying for the account to see whether you're likely to be offered an overdraft.

Triodos 18% EAR overdraft

Triodos offers arranged overdrafts up to £2,000, charging a flat rate of 18% EAR.

Its current account costs £3 per month to operate.

It doesn't provide unarranged overdrafts, so if you don't have available funds, the payment will be blocked.

First Direct 0% overdraft up to £250

First Direct offers an interest-free overdraft of £250 on its standard current accounts (subject to status). However, if you borrow more than £250, you'll pay 39.9% EAR.

It used to charge a market-leading overdraft rate of 15.9% EAR. This change has meant the cost of borrowing more than doubled for some customers.

Use the bank's eligibilty tool before applying for the account to see whether you're likely to be offered an overdraft.

Monzo 19% EAR overdraft for some

Monzo previously charged a daily overdraft fee of 50p, but this was replaced with a rate of 19%, 29% or 39% EAR depending on your TransUnion credit score.

The bank allows customers to borrow up to £2,000. You can change your overdraft limit from the app at any time. If you want to cancel the overdraft you must pay back the amount you borrowed, plus any interest owed.

Use the bank's eligibilty tool before applying for the account to see whether you're likely to be offered an overdraft.

Nationwide FlexDirect 0% for a year

Although Nationwide's FlexDirect account offers an interest-free overdraft for a full year, we haven't included it in our table because after this, you'll be stung with a rate of 39.9% EAR.

You can use the building society's eligibilty tool before applying for the account to see whether you're likely to be offered an overdraft.

Don't switch to this account if you aren't confident you can clear the overdraft debt within a year.

If you've held a FlexDirect account in the past 12 months, you won't be eligible for the interest-free overdraft.

Worst banks for overdrafts

We previously ranked the worst banks for overdrafts, based on interest rate and fees.

But since the FCA's new rules came into force in early 2020, many banks now charge 39.9% (Bank of Scotland, First Direct, Halifax, Lloyds, Nationwide, TSB) while a handful of banks charge even more than this, while Santander charges 39.94%.

If you regularly dip into your overdraft with these banks, consider switching to one of the banks with a lower overdraft rate or a generous interest-free buffer, mentioned above.

If you've been using your overdraft for an extended period, consider speaking to a debt-advice charity such as StepChange.

What rules do banks have to follow on overdrafts?

We've repeatedly reported that unarranged overdraft charges can be more expensive than using a payday loan, and we've been campaigning to get banks to bring them in line with those for arranged overdrafts.

The Financial Conduct Authority (FCA) eventually stepped in, announcing new rules to fix the 'dysfunctional' overdraft market, in force from 6 April 2020.

This means banks and building societies must:

• stop charging higher prices for unarranged overdrafts than for arranged overdrafts
• scrap fixed daily or monthly charges and fees for having an overdraft facility
• price overdrafts by a simple annual interest rate to help customers compare them against other products
• do more to identify customers who are showing signs of financial and implement a strategy to reduce repeat overdraft use.

Introducing a flat rate prevents banks from making large profits on the backs of the most financially vulnerable. However, the FCA stopped short of placing a cap on the cost and some of the largest banks introduced rates as high as 40.36% EAR.

This prevents banks from making large profits on the backs of the most financially vulnerable. However, some customers will see the cost of borrowing rise steeply.

Other measures to improve overdrafts

As well as forcing banks to ditch unarranged overdraft fees from April 2020, the FCA has identified and implemented other measures to increase customers' engagement with their overdraft use and charges.

Led by the retail banking market investigation of the Competition and Market Authority (CMA) in 2016, the FCA wants banks to improve understanding and management of overdrafts through:

• text messages or push notification alerts warning of potential overdraft charges – the CMA announced in May 2020 that five current account providers have refunded £47m in two years for breaching this rule
• online and in-app tools to assess eligibility for overdrafts without it appearing on credit reports
• online calculators to show the cost of overdrafts for different patterns of use
• banning showing overdrafts as 'available funds' to ensure that overdrafts are presented clearly as debt.

Read more in the FCA's final report into overdrafts and other forms of high-cost credit.

Is it bad to use an overdraft?

Firstly, not all overdrafts cost the same, as you can see from the tables in this guide.

Secondly, overdrafts are a very flexible form of credit, because you're free to borrow as much or as little as you like up to your agreed limit, and can pay it back without incurring an early repayment fee.

However, they are a very expensive way to borrow long-term, particularly if your bank charges a daily or monthly fee as well as debit interest. An unsecured personal loan is more suitable for long-term borrowing.

How much overdraft can I get?

Overdraft limits are usually set when you first apply to open an account, based on your individual financial circumstances.

Occasionally banks will offer an automatic overdraft, but generally they will consider your monthly incomings and outgoings, your credit score and employment status before deciding how much they're willing to offer you.

Your bank might agree to extend your overdraft limit at a later date, either temporarily or permanently. But all banks can reduce or cancel an overdraft at any time.

Does an overdraft affect my credit score?

Overdrafts show up on your credit report.

However, lenders treat overdrafts in different ways when deciding whether to lend to you.

If you're applying for a mortgage, lenders will ask to see your bank statements (typically your last three months' worth).

Using an arranged overdraft sparingly shouldn't cause any problems, unless you've applied for more finance or demonstrated poor money management in other ways.

However, living in your overdraft from month to month or having missed payments could scupper your chances.

Can I switch banks if I'm in my overdraft?

Being overdrawn shouldn't stop you from switching to a new account - it should encourage you to shop around, because overdraft users are more likely to gain from switching than other customers.

When you switch using the seven-day Current Account Switching Service (CASS), your overdraft can be transferred over, although your new bank might not match the overdraft limit you had before.

If you can't move the old overdraft over to the new account, you will need to repay some, or all, of the existing overdraft before you switch.

Can I get an overdraft with a joint bank account?

Most joint bank accounts are run on an 'either-to-sign' basis, where all parties can authorise transactions and make decisions independently.

Crucially, this means anyone can increase or decrease an overdraft. Also, each person is responsible for the overdraft, even if they didn't run up the debt.

Banks can even transfer money from any other accounts you hold with them to cover the debt on your joint account (but not the other way around).

How do I pay off my overdraft?

• Ask your bank to extend your overdraft or waive the fees to give you some breathing space.
• Use mobile and online banking to check your balance regularly and keep an eye on outgoings.
• Sign up for text alerts to warn you when you're approaching your overdraft limit to help you avoid charges.
• Change payment dates to make sure standing orders and direct debits leave your account at the right time, ideally shortly after you get paid.
• Switch to a cheaper bank offering an interest-free overdraft or lower overdraft charges.
• Shift the debt to a 0% credit card if you have a large overdraft that you can't pay off quickly. Read our guide to learn the golden rules for transfers.
• Open a basic account with no overdraft facility if you think this will help you to manage your money better.

Find out more in our guide to how to deal with debt