Best bank accounts for overdrafts 2024

The equivalent annual rate (EAR) is the interest you would pay if your account were to remain overdrawn for a whole year. 

It takes into account compound interest (charging interest on interest) but does not include any additional fees you may be asked to pay for going overdrawn. 

Banks may also refer to the annual percentage rate (APR), which shows you the cost of credit including any additional fees, assuming you borrow £1,200 over the course of a year. Banks will often advertise a 'typical APR' rather than the actual interest rate (which will depend on your credit record) but it must offer this headline rate to at least 51% of potential customers.

There used to be a difference between arranged and unarranged overdrafts and how much they cost. 

But since 2020 banks have to charge a flat percentage-based interest rate for overdrafts.

All overdrafts are now 'arranged', in the sense that you must apply for them while setting up the account. You don't need to apply each time your balance goes below £0.

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.

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.

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.

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.

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.

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).

An overdraft isn't the cheapest way to borrow for the long term (an unsecured personal loan may be better). If you're struggling to pay your overdraft off, try the following:

• 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