Overdraft debt: Things to consider

An overdraft is a type of credit provided by a bank that lets you withdraw more money than you have in your account.

Your bank will set an overdraft limit, so you can borrow up to that amount, even if your balance is zero.

People often use it as a short-term financial back-up if they’re running low on cash.

But it can incur fees or interest, so it’s best used sparingly and within the agreed limit.

It’s also important to remember that overdrafts are payable on demand, so your bank could ask you to repay the full balance at any time.

Money paid into your account will usually be used to reduce your overdraft balance first.

So if most of your income goes towards bills and other essential costs, clearing the overdraft completely can be difficult.

If you find yourself regularly overdrawn just before you get paid, it could be worth adjusting your direct debit dates so you don’t have to spend as many days in your overdraft each month and you don’t get hit with extra interest charges.

Unlike a loan with a fixed repayment schedule, there isn’t a set time limit to pay back a standard overdraft.

Your bank can ask for payment in full at any time.

But it’s worth trying to avoid staying in your overdraft for long periods because this could trigger warnings or account changes, and may also affect your credit rating.

And the longer you stay overdrawn, the more interest builds up, and that could make it harder for you to get back into credit.

If you’re struggling to repay your overdraft, your bank may add more interest or charges.

If you stay overdrawn for a long time, go over your agreed limit, or your bank closes your account and records a default, this can be reported to credit reference agencies and may affect your credit score.

In more serious cases, your bank could take court action to recover the money.

This could result in a County Court Judgment (CCJ).

If you’re finding it hard to manage your overdraft, don’t ignore it. Speak to your bank as soon as possible — they may be able to help by: 

• freezing interest or charges
• agreeing a repayment plan
• reducing or removing your overdraft
• suggesting you switch to a basic bank account

Yes, you can transfer money from your overdraft to another account you own, but it’s still borrowed money, so interest and fees will apply until you repay it.

There’s no official definition of what constitutes a large overdraft.

But it might be considered large if it’s causing serious problems. 

For example:

• if it’s a large amount compared to your income
• you’re in your overdraft most of the month
• you never reach a positive balance
• a big share of your income goes towards paying interest or other fees

If these issues sound familiar, it could be worth speaking to a debt adviser, who can help you find the right solution.

If you go over your agreed overdraft limit, payments like direct debits or standing orders may be declined.

You could also be hit with very high interest rates or extra fees, and if your account remains over its overdraft limit, your credit score could be affected.

If this happens regularly, your bank might choose to reduce your limit or close your overdraft completely.

If you want to take control of your overdraft, there are a few practical steps you can take.

Create a realistic budget

Get on top of your budget, so you can clearly see how much money you have coming in and where it’s going.

Our budget calculator can help you identify where possible savings can be made, so you can prioritise your spending and free up cash for vital expenses.

Check our guide on how to create a budget to get started.

Look at your spending habits

Ask yourself questions like:

• Are there subscriptions I’m paying for but not using?
• Could I switch energy or phone providers to save money?
• What small treats or habits could I cut back on, just a little?

You might be surprised at how much money you’re spending on things you don’t need or use.

Find out what benefits you can claim

You might be entitled to financial support from the government, so use our benefits calculator to see what help you could get.

If you’re regularly in your overdraft, your bank should let you know and tell you what it’s costing you.

They should also give you information or tools that can help you manage your money.

The bank has to treat you fairly and shouldn’t do anything that makes your situation worse.

If they don’t, you have the right to make a formal complaint or even escalate your case to the Financial Ombudsman Service.

Pay priority bills first

Before trying to pay extra toward your overdraft, make sure you’re staying on top of other vital expenses.

Focus on priority bills first, such as rent, mortgage payments, energy and council tax.

These are the ones that could have the most serious consequences if you don’t pay them, such as losing your home or having your gas or electricity supply cut off.

Know your “first right of appropriation”

If your bank won’t let you access your income for essentials, remind them of your “first right of appropriation”, which lets you use your income for bills and living costs before repaying debt.

Consider opening a basic bank account with another bank

A basic bank account doesn’t have overdrafts, so if you open one with another bank, you could get your income paid there.

That would stop your main bank from automatically taking money toward your overdraft.

If you’re struggling to clear your overdraft, you might start considering getting a loan.

But you don’t want to risk getting trapped in a cycle of debt that you can’t get out of.

That’s why it’s so important to speak to a debt adviser, who can give you practical, confidential and impartial support, and recommend the most suitable way forward.