1 in 5 UK adults go into overdraft every month
With the price of everyday essentials such as groceries and monthly bills rising, coupled with interest rates and rent increases, many families cannot make earnings stretch far enough. But just how bad is it?
Figures from a recent survey* conducted by MustCompare show many adults in the UK are struggling to make it to payday. Nearly 1 in 5 (19%) UK adults said they use their bank overdraft every month. An additional 11%, or a total of 30%, have gone overdrawn at least once in the last 3 months. While 20% said they did not have an overdraft.
Is going overdrawn dangerous, and are they best avoided? What are the costs? What's the difference between authorised and unauthorised overdrafts? Read on to find out the answer to these and other related questions.
- What is an overdraft?
- Are bank overdrafts good or bad?
- What is the cost of an overdraft?
- What are authorised and unauthorised overdrafts?
- How do I control my overdraft usage?
What is an overdraft?
An overdraft is a way to borrow money through a current account and occurs when an account has a below-zero or negative balance. Overdrafts happen when your bank allows a payment or transaction to go ahead even though there may not be enough money to cover it - in other words, you go overdrawn.
Your bank may offer overdraft as part of your current account services, or you may need to ask for the service if you think it's worthwhile. Like applying for a loan, banks will look at your circumstances before approving an overdraft. Most basic accounts and bank accounts for 16-year-olds or under 18-year-olds do not come with overdraft services.
While it can be helpful to have an overdraft to fall back on in an emergency, there are usually charges for using this service, and these don't tend to be cheap. Additionally, regularly going into overdraft is not suitable.
Are bank overdrafts good or bad?
Bank overdrafts can be useful. For example, you can pay a bill even when there is insufficient money in your account, and the money can be paid back as soon as you have funds in your account. This has helped many families see the month through to payday and avoid fees for bounced or returned payments.
The problem is when you are constantly using your overdraft or going overdrawn.
While an overdraft is likely cheaper than short term loans, banks can charge up to 40% on the amount overdrawn. If the amount borrowed is relatively large and remains unpaid for a long period or is frequently used, costs can start to add up.
Overdrafts should be used for emergencies or as a short-term borrowing option. Your bank can remove overdraft services from your account if they think you are using it excessively or in financial difficulty. If you go over an agreed limit, your bank may stop any further withdrawals and payments until funds are returned to your account.
Note: Overdraft services on your account can be removed. This can happen if you're using it excessively or your bank thinks you're struggling financially.
What is the cost of an overdraft?
Interest rates charged on overdrafts usually range from 19% to 40%. Changes implemented by the FCA in 2020 simplified overdraft charges. For example, daily and monthly fees were replaced with a single interest rate and capped at 40%. Additionally, there are no longer additional charges for unauthorised overdrafts.
You can find what you will be charged on your bank's website. As part of the new banking rules, banks must have a public calculator tool where you can enter the amount and number of days overdrawn and see the exact charges.
Some banks offer their customers overdraft interest-free, where no charges apply for an agreed amount. For example, First Direct 1st Account customers can have overdraft interest free with a limit of £250 (subject to status). And new Nationwide Flex Direct customers can get 0% interest on arranged overdrafts for 12 months (afterwards, the interest is 39.9%).
Generally, most of the larger UK banks charge between 35% to 40% - including:
- HSBC - 39.9%
- Halifax - 39.9%
- Barclays - 35.0%
- Nationwide - 39.9%
- Lloyds - 39.9% (or 27.5% on certain accounts such as Club Premier and Club Gold)
- Natwest - 39.49% (or 19.49% on certain accounts such as Reward Black and Premier Select)
(The above information is correct as of 1 September 2023.)
It's worth spending time to compare current accounts, as some less "mainstream banks" or mobile banks offer competitive rates. For example, Starling Bank offers interest rates of 15%, 25% and 35% (depending on credit ratings and circumstances).
Similarly, Monzo Bank offers current account customers interest rates of 19%, 29% or 39% (depending on credit ratings and circumstances). While Triodos Bank offers all their current account customers a rate of 18%. If you need more information on switching accounts, you may find our guide "How to Switch Bank Accounts" helpful.
What are authorised and unauthorised overdrafts?
Authorised overdrafts (sometimes referred to as arranged overdrafts) are credit agreed by your bank, allowing you to go overdrawn by a certain amount. An unauthorised overdraft occurs when your account is overdrawn by an amount not agreed by your bank. This is also known as an 'unplanned' or 'unarranged' overdraft.
An unauthorised overdraft can occur when your bank allows a transaction to proceed, even though it will exceed the limit agreed. There is no difference between authorised and unauthorised overdraft charges, and interest rates are the same. However, even with an arranged overdraft in place, your bank may stop your account from exceeding the agreed limit.
How do I control my overdraft usage?
Try to keep track of your overdraft usage - here are a few tips:
- You can download your bank's app to your phone and set up alerts for low account balances, which may help you keep an eye on spending. Keep your mobile safe to protect yourself from mobile theft and phone fraud.
- Regularly check your account balance to ensure you have enough money to cover upcoming bills.
- You may find it helpful to set up a monthly spending budget. Sign up to our monthly newsletter by completing the quick form below and get our free budget planner.
Also, you may want to look at cheaper alternatives and other forms of credit, for example, a low-interest credit card or a personal loan instead. If you are struggling financially, it's best to seek help and talk to someone. There are organisations who can offer you support, financial and debt advice.
In summary
Overdrafts can be useful to get you to payday and avoid fees for bounced or returned payments. However, overdrafts are not a safe long-term or frequent borrowing option and can be taken away by your bank, and with overdraft statistics showing nearly 1 in 5 going overdrawn each month, there is cause for concern.*
Keeping a regular eye on your account balance and having a monthly spending plan may help. There are also cheaper alternatives, and it may be worth checking what offers banks charge to see if you can get a better deal. If you're regularly overdrawn and struggling financially or with debt, seek help; qualified professionals can help and guide you.
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* Overdraft statistics based on a survey with 500 responses conducted in the UK in August 2023. When asked, "How often do you use your bank overdraft or go overdrawn?", 19% said "Every month", 11% said "Once every 2 to 3 months", 5% said "Once every 6 months", 3% said "Once every 12 months", 42% either said "Very rarely" or "I never go into overdraft" and 20% said "I do not have a bank overdraft".