Overdrafts are commonplace in the UK – around 26 million of us Brits use one each year. They are a useful source of emergency cash that you can use to see you through until you next get paid. Dipping into an overdraft is going into a form of debt. This is why they should only be used for emergencies and you should understand all the fees and costs involved before you use one.

The Financial Conduct Authority (FCA) announced last year that the rules on overdrafts would be changing. In April 2020, the changes took effect. Banks can now only charge one annual interest rate for overdrafts. They can no longer add fixed fees, such as daily usage fees or monthly charges. 

Fees for unarranged overdrafts varied greatly. Some overdrafts charged a daily rate for using them, others charged different amounts of interest depending on how much you were overdrawn. Confusing fees made calculating the true cost of an overdraft difficult.

The costs for the type of overdraft also varied. An unarranged overdraft tended to have much higher fees than an arranged overdraft. To make things clearer and fairer to the consumer as of April 2020 banks can only charge a single interest fee. Unarranged overdraft users will benefit or see no change from this regulation. However, those with arranged overdrafts may find themselves worse off.

The graphic below will outline the changes to overdraft fees in 2020.

Infographic showing the change in overdraft fees in 2020

What is an overdraft?

There are two types of overdrafts: an arranged overdraft and an unarranged overdraft. An arranged overdraft is an agreement with your bank that you can go below zero on your account. You agree on the limit and interest rate in advance. You can take this money out when you need it without notifying your bank. If you go over your arranged overdraft limit you will enter an unarranged overdraft.

An unarranged overdraft is an overdraft that you have not agreed on in advance with your bank. This happens when you become ‘overdrawn’, or have spent more money than you have in your account.

Infographic showing the average use of arranged and unarranged overdrafts in the UK in 2017

id= “How is an overdraft useful?” > How is an overdraft useful

An overdraft can be useful as a form of short-term borrowing. It can act as a financial safety-net to tide you over until your next paycheck arrives. Like a loan, an overdraft is a form of debt. However, overdrafts are a more flexible form of debt than a loan. For example, on an overdraft, you are only charged interest on the amount you withdraw.

For more information on how an overdraft differs from a loan and to see if you should get one click here.

Overdraft changes in 2020

Finder.com estimates over half of unarranged overdraft fees came from 1.5% of customers in 2016. The revenue generated from these fees was estimated at £720 million in 2017. This data shows some people are paying far more for overdrafts than others.

Infographic showing the revenue made by banks from overdrafts in 2016 and 2017

To stop this, the UK Financial Conduct Authority (FCA) announced the following changes:

  • Banks must introduce a single interest rate or EAR on all overdrafts (ie arranged and unarranged overdrafts)
  • Costs for an unarranged overdraft can no longer be higher than for an arranged overdraft
  • Fixed fees (daily / monthly usage fees) must be scrapped
  • Banks must standardise the advertising and pricing of overdrafts so consumers can compare products. Many banks have now introduced ‘overdraft calculators’ that follow the same format so you can easily compare the cost. 
  • Refused payment fees should correspond to the amount of the refused payment. Banks would be unable to charge an £8 unpaid transaction fee if the cost of the transaction was significantly lower
  • Banks must identify customers in financial difficulty and help them reduce their overdraft usage

The chart below shows the change in overdraft fees by bank, for both an unarranged and arranged overdraft of £100 over seven days.  

Table showing the change in overdraft fees for an unarranged and arranged overdraft of £100 over 7 days before and after the April 2020 changes

The graphs below outline the change in fees for a £100 overdraft over a period of 7 days (source: FCA).

Graph showing the change in fees for borrowing £100 over 7 days in an an arranged overdraft in GBP in 2020
Graph showing the change in fees for borrowing £100 over 7 days in an an unarranged overdraft in GBP in 2020

*Barclays and Nationwide were removed as they no longer offer an unarranged overdraft facility on these accounts. Lloyds, Bank of Scotland and Halifax have no change in charges and were also removed.  

Barclays overdraft changes 2020

Barclays changed its fee structure for overdrafts as of March 22nd 2020. Barclays used to charge a daily rate for using an unarranged overdraft. As of March 22nd, Barclays no longer offers that facility. For arranged overdrafts, Barclays have increased the annual interest rate to 35%.

Natwest overdraft changes 2020

NatWest has now increased its overdraft charges to an EAR of 39.49%, which will come into effect on 14 July. The bank has also reduced its refused payment transaction fee to £2.75.

NatWest used to charge a daily usage fee of £8 for unarranged overdrafts rather than interest. To be charged the account had to be overdrawn by more than £10. NatWest also charged a refused payment transaction fee of £8.

Santander overdraft changes 2020

Santander changed its overdraft charges on 6 April 2020. Santander is now charging 39.9% EAR. The bank states that their new rate is an equivalent 9p daily fee for every £100 borrowed. Santander has also removed its £50 monthly fee cap for unarranged overdrafts.

Lloyds overdraft changes 2020

Lloyds bank used to charge pretty confusing fees. They used a tier system and charged a daily fee of:

  • 1p for every £6 on overdrafts of up to £1,250
  • 1p for every £7 for overdrafts between £1,250 and £2,500 and
  • 1p on every £8 for overdrafts over £2,500.

Lloyds changed their overdraft fees on 6 April 2020. For an overdraft some cards* have an interest rate of 27.5% EAR. All other accounts now have an EAR of between 39.9% and 49.9%. The EAR rate is dependent on your credit score. The better your score – the better the rate. If you want to get a better credit score, look at our guide on how to build your credit score the right way. 

Lloyds will not charge an interest rate on an unarranged overdraft, but may refuse the payment.

*Cards included are: Club Lloyds, Club Lloyds Platinum, Club Lloyds Silver, Club Lloyds Gold, and Club Lloyds Premier cards

HSBC overdraft changes 2020

HSBC no longer charges a daily fee for using an unarranged overdraft and now charges 39.9% EAR. HSBC has also decreased the maximum monthly charge for overdraft fees from £80 to £20 a month. The bank has also introduced an interest-free buffer of £25 on their Bank and Advance Accounts. 

These changes are good news for HSBC’s unarranged overdraft customers. However, millions of HSBC’s arranged overdraft customers will be paying more than they were before. The graphic below shows how much an arranged overdraft will now cost consumers, based on the average amount borrowed by consumers in the UK.

Infographic showing the change in overdraft fees in 2020 mean 8 million HSBC customer could be worse off

Source: Average overdraft amount Finder.com 2020, customer numbers The Guardian ‘Eight million users will pay more for going into the red’.

TSB overdraft changes 2020

From the 2nd April 2020, TSB changed their flat rate for charging overdrafts to 39.9% EAR. TSB has also removed the interest-free unarranged overdraft buffer on their accounts.

How will the cost of the average arranged overdraft change in 2020?

The table below shows the fee change in the average amount taken in arranged overdrafts in the UK from 2017 to April 2020.

Table showing the fee change in the average amount taken out in arranged overdrafts in the UK from 2017 to April 2020

TSB interest-free overdraft amounts 2020

Table showing interest free overdraft amounts at TSB bank in 2020

Lloyds interest-free overdraft amounts 2020

Table showing interest free overdraft amounts at Lloyds bank in 2020

Santander interest-free overdraft amounts 2020

Table showing interest free overdraft amounts at Santander bank in 2020

Barclays interest-free overdraft amounts 2020

Table showing interest free overdraft amounts at Barclays bank in 2020

What happens if you can’t pay your overdraft?

If you’re unable to pay back your overdraft in full, you will still be charged interest on the outstanding amount left. If you find your financial situation worsening, don’t panic. The first step is to understand your financial health. Once you have done this, build a budget to understand the amount you can afford to repay. If you need help understanding how to get out of debt, take a look at our blog outlining 5 debt repayment options.

Not paying your overdraft, or regularly going into an unarranged overdraft can have a negative impact on your credit score. This may make it more difficult to get a credit card or loan in the future. Interest rates on loans or a mortgage will be higher if you have a lower credit score. If you want to build your credit score, take a look at our guide to building credit the right way.

If you regularly do not repay your overdraft, then your bank may close your account. Banks are legally allowed to close your account but must inform you when they do so. Your bank closing your account can make getting an account with a different bank or a future loan more difficult.

If you are worried about becoming overdrawn sign up to low balance alerts. A low balance alert will notify you if you are approaching a specific amount on your account. This will help you avoid any overdraft fees. We have compiled a list of banks offering free low balance alerts. If you are looking for an app that alerts you to your low balance automatically, check out Portify.

Why would a bank cancel your overdraft?

A bank can cancel your overdraft if the bank feels that it has no other option. Usually, this is because the bank cannot contact you despite repeated attempts. Communicating with your bank is important. Not responding to your bank can make them believe the relationship with you has broken down. At this point, the bank may close your account. If you are overdrawn the bank may pass any overdraft debt and associated fees to a debt collection agency. This will impact your credit score as debt collection agencies report to credit bureaus.

If you think your bank cancelled your overdraft in error, contact them immediately. If the response from your bank isn’t satisfactory you can escalate the matter to the Financial Ombudsman.

Screenshot of Flex Finance from UK credit builder app Portify

Flex Credit Loans by Portify – Flex Finance

If you are unable to get an overdraft, you may want to look into other options. Portify Flex Finance offers interest-free loans as an alternative to an emergency overdraft. Users can borrow up to £250 from Portify and pay it back when suits them.

How is interest on an overdraft calculated?

Interest on an overdraft is now calculated using the Effective Annual Interest Rate or EAR for short. EAR takes compound interest into account. Compound interest is simply interest on interest.

For example, if you have an overdraft of £1,000 and the EAR is 1%, your £1,000 will grow to £1,010 at the end of the year. The next year, you will pay interest at an EAR rate of 1% on £1,010. This goes on until the entire amount is paid in full.

To calculate EAR and see how much a loan would cost you use an EAR calculator. There is an EAR calculator available here.

How many overdrafts can you have?

In theory, you can have as many overdrafts as banks will give you. However, this is not advised. By opening several overdrafts you will have multiple lines of debt open. That can cause you serious financial problems as it may lead you into a debt spiral. The answer to getting out of debt is not to open more overdrafts or bank accounts. In fact, opening more accounts can sometimes make the process of getting out of debt harder. If you are in a debt spiral look at our blog on 5 debt repayment options.

Not repaying on-time or going over your overdraft limit can impact your credit score. This impact is multiplied if this occurs across multiple accounts. If you are managing a few overdrafts, make sure you keep on top of them.

Portify: the UK credit builder app

screenshot of credit boost homepage from UK credit builder app Portify

Some people are unable to get an overdraft at all. This may be because you: have a bad credit score; previous debt issues; or, are new to the UK. If you fall into one of these categories you may want to look into credit building services. Portify’s credit boost service reports monthly repayments to Experian. Each on-time monthly payment builds your credit history.

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Lauren Robson is the digital communications manager at Portify.
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