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Best bank accounts for arranged overdrafts

Avoid expensive bank account charges with our table of the best current accounts if you use an authorised overdraft. 

In this article
Coronavirus (COVID-19) overdraft update How does an overdraft work? Banks with cheap or free overdrafts The best banks for overdrafts in detail Worst banks for overdrafts  What rules do banks have to follow on overdrafts?
Is it bad to use an overdraft? How much overdraft can I get? Does an overdraft affect my credit score? Can I switch banks if I'm in my overdraft? Can I get an overdraft with a joint bank account? How do I pay off my overdraft?

Coronavirus (COVID-19) overdraft update

The Financial Conduct Authority (FCA) has introduced emergency measures to help bank customers affected by coronavirus. 

Banks have been told to offer overdraft interest holidays of £500 and ensure that overdraft users are no worse off on price when compared to the prices they were charged before recent overdraft changes came into force. 

Consumers using any of these measures should not see their credit rating affected.

Coronavirus may affect opening new accounts with some banks, for example, First Direct current accounts have been temporarily withdrawn from sale so it can focus on existing customers. 

Overdraft payment holiday

As well as a three-month repayment freeze on loans and credit cards, the FCA has asked banks to remove charges for three months on arranged overdrafts up to £500.

All regulated firms will be ready to receive customer requests by 14 April, although the major banks and building societies have already adopted the changes. 

In most cases, the interest-free buffer of £500 for three months is applied automatically, though there are exceptions so check your bank's website or social media for details:

- Nationwide has asked customers who need an increased overdraft limits or an arranged overdraft interest holiday (which will apply from 20 April until 1 July) to complete an online form.

- Starling Bank customers must also apply for an overdraft interest holiday of 90 days starting from the day their application is accepted.

Reduced overdraft charges 

A few banks have announced temporary reductions on their standard overdraft rates: 

- Nationwide will temporarily reduce its overdraft interest rate from 39.9% APR to 18.9% APR for three months from 17 April, applied to all FlexDirect, FlexPlus and FlexAccount current accounts automatically.

- Santander will charge 19.9% EAR (usually 39.9% EAR) between 6 April and 9 July.

 

 

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:

Arranged overdrafts

Sometimes called authorised or formal overdrafts, these are agreed with your bank in advance up to your overdraft limit, which will be reviewed on a regular basis.

Unarranged overdrafts

Sometimes called unauthorised or informal overdrafts, this is when you go overdrawn past your arranged overdraft limit, or (if you don’t have an arranged overdraft) when your balance falls below £0.

Banks used to charge as much as £10 per day for unarranged overdrafts but, as of 6 April 2020, they can no longer penalise customers who go over their overdraft limit. Banks are also banned from charging daily or monthly overdraft fees

However, a handful of banks - Tesco Bank, TSB, NatWest and RBS - will still impose a fixed returned item fee if there aren't enough funds in your account and a payment bounces (we make a note of these fees in our tables). 

     

    Banks with cheap or free overdrafts

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

    Many lenders have announced they will charge customers as much as 39.9% AER but there are still better deals available if you think you will 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 those reserved for private banking customers). 

    Provider Account name undefined Arranged overdraft charges (EAR) Cost of £500 overdraft for one week

    Recommended provider

    Starling Bank

     

    More info

    Starling is replacing its flat rate of 15% with a rate of 15%, 25% or 35% EAR dependent on your credit score from 1 April 2020. Only those with excellent credit scores will be offered 15% EAR though its higher rates still beat the high street banks. Starling uses TransUnion and Equifax to decide what overdraft rate to offer customers. Pricing will be reviewed on a monthly basis (though your rate will only change once in any 12 month period). 

    Current Account 83% 15% £1.34

    Recommended provider

    First Direct

     

    More info

    First Direct will continue to offer a 0% overdraft on the first £250 borrowed but as of 14 March 2020, customers pay 39.9% EAR beyond this, up from 15.9% previously.

    1st Account

    84%

    0% under £250 then 39.9%

    £1.61

    Recommended provider

    M&S Bank

     

    More info

    M&S Bank increase it's 0% overdraft buffer from £100 to £250 on 14 March 2020 but you pay 39.9% EAR beyond this, up from 15.9% previously.

    Current Account 76% 0% under £250 then 39.9% £1.61
    Tesco Bank

     

    More info

    Tesco Bank already prices arranged and unarranged overdrafts by a single interest rate. It told us it has no plans to change the current rate of 18.9% EAR. A transaction fee of £5 applies if you make a payment and there aren't enough funds (max 10 per month) and overall unarranged charges are capped at £75 per month. 

    Current Account 60% 18.9% £1.66

    Monzo

     

    More info

    Monzo has removed its daily overdraft fee of 50p per day and replaced it with a rate of 19%, 29% or 39% EAR dependent on your credit score. Monzo will use TransUnion to decide what overdraft rate to offer customers. The bank told Which? that it doesn't proactively change anyone's overdraft rate so if your credit score improves, you would need to pay off your overdraft and re-apply to get a better deal.

     

    Current Account

    82%

    19% £1.67

     

    Data correct as of September 2020

    Which? Customer Score: Our rating for customer satisfaction, based on feedback from real customers. The score is made up of a customer's overall satisfaction with the brand, and how likely they are to recommend that brand to a friend. We surveyed 4,216 members of the general public in September 2019. Our full table includes scores and star ratings for all banks. 

    Some banks offer interest-free 'buffers' which means you don't face any charges if you borrow up to this amount.

    The most generous offers are from First Direct and M&S Bank. Barclays offers an interest-free buffer of £100 to its packaged account customers, costing from £12.50 (Travel Pack).

    The best banks for overdrafts in detail

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

    Mobile-only bank Starling offers the cheapest arranged overdraft on the market but only if you have a decent credit score. 

    Starling Bank previously offered a flat rate of 15% to all customers but from 1 April 2020, ovderdrafts will be 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 face a new rate of 25%, overdraft charges for borrowing £500 for seven days will increase from £1.35 to £2.19, while those paying the highest rate of 35% will be charged £2.97. 

    The maximum overdraft will remain at £5,000, subject to status.

     

    More about Starling Bank

     

    Starling will use credit reference agencies TransUnion and Equifax to help it decide how much to charge you and rates will be reviewed on a monthly basis (though your rate will only change once in any 12 month period). 

    The bank sends instant notifications when you’re using your overdraft and you can use the app to see how many days you’ve been in your overdraft, and how much interest you’ve accrued.

    For the first time, we were able to include Starling Bank in our annual banking survey in September 2019 and it went straight into the top two and has been named a Which? Recommended Provider for current accounts. 

    First Direct and M&S Bank 0% overdraft up to £250 

    Which? Recommended Providers First Direct and M&S Bank both offer an interest-free overdraft of £250 on their standard current accounts. 

    However, if you borrow more than £250, you’ll pay 39.9% EAR.

    Both banks used to charge a market leading overdraft rate of 15.9% EAR. These changes have meant the cost of borrowing has more than doubled for some customers 

     

    More about First Direct and M&S Bank

     

    First Direct regularly offers a £100 bonus to people who switch to it, though it has paused applications for its current accounts due to the pandemic. 

    You need to complete a full switch using the Current Account Switch Service (which means you close your old account and move your regular payments across) and pay in £1,000 within three months of opening the account to be eligible for this bonus.

    Bear in mind that First Direct shares deposit protection with its parent bank HSBC.

    M&S Bank is part of the HSBC Group but operates under its own licence so you are entitled to full protection up to £85,000. 

    Nationwide FlexDirect 0% for a year

    Though 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.

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

    This account also rewards you for being in credit - if you pay in £1,000 or more a month, you'll earn 2% on balances up to £1,500 in the first year, then 0.25%.

    Previously, the building society paid 5% on £2,500, then 1% thereafter. 

     

    More about Nationwide

     

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

    You should aim to clear any overdraft debt before the year is up or you'll pay a whopping 39.9% EAR. 

    Nationwide is a Recommended Provider and is consistently rated very highly by its customers. The building society offers a ‘refer-a-friend’ bonus of £100 each for you and up to five friends per tax year, if they successfully switch their main current account.

    Worst banks for overdrafts 

    In the table below, we show the worst banks for an overdraft of £500 for one week.

    Many lenders are charging 39.9% EAR with no interest-free buffers but for customers with poor credit ratings, Lloyds is charging an eye-watering 49.9% EAR. 

    Provider

    Account name

    undefined

    Arranged overdraft charges (EAR)

    Cost of borrowing £500 for a week

    Bank of Scotland

     

    More info

    From 6 April 2020, Bank of Scotland will charge customers 39.9% EAR or 49.9% EAR depending on account management and credit history.  BoS packaged accounts have a £50 interest-free buffer. 

    Classic

    Vantage

    64% 49.9% £3.90
    Lloyds

     

    More info

    From 6 April 2020, Lloyds will no longer charge 1p for every £7 borrowed. Instead customers will pay 39.9% EAR or 49.9% EAR depending on account management and credit history. Club Lloyds customers have a £50 buffer and pay either 27.5% or 49.9%. Packaged accounts also have a £50 buffer. 

    Classic

    69% 49.9% £3.90
    Halifax

     

    More info

    From 6 April 2020, Halifax will charge 39.9% EAR or 49.9% EAR depending on account management and credit history. The Ultimate Reward account has a £50 interest-free buffer. 

    Reward 70% 49.9% £3.90
    TSB

     

    More info

    TSB used to charge 19.84% EAR plus a monthly usage fee of £6 for planned borrowing with an additional daily fee of up to £10 a day for unarranged overdrafts. Now, all borrowing costs 39.9% EAR with no usage fee. TSB charges £3 if you make a payment and it is refused due to lack of funds. The maximum monthly charge is £30 for returned item fees and unarranged overdraft interest together.

    Classic

    Classic Plus

    65% 39.9% £3.23 

    Santander

    More info

    Santander will charge a standard rate of 39.9% EAR. Only Choice Account (costing £10 per month) customers will pay a lower rate of 29.9% with interest capped at £20 per month.

    123

    123 Lite

    70%

    39.9%

    £3.23

    Recommended provider

    Nationwide BS

     

    More info

    Nationwide charges a standard rate of 39.9% EAR for all borrowing. The FlexDirect account comes with an interest free arranged overdraft for 12 months, however, this is subject to status and your individual personal circumstances.

    FlexAccount

    FlexDirect

    FlexPlus

    78% 39.9% £3.23 
    NatWest

     

    More info

     Most accounts attract a rate of 39.49% EAR (Reward Black/Premier Select customers pay a lower rate of 19.49%). If a payment is refused due to lack of funds you will be charged £2.75 (max one fee per charging period). The maximum monthly charge is £17.25 for returned item fees and unarranged overdraft interest together.

    Select

    Reward 

    Black

    69% 39.49% £3.20
    RBS

     

    More info

    Most accounts attract a rate of 39.49% EAR (Reward Black/Premier Select customers pay a lower rate of 19.49%). If a payment is refused due to lack of funds you will be charged £2.75 (max one fee per charging period). The maximum monthly charge is £17.25 for returned item fees and unarranged overdraft interest together.

    Select

    Reward 

    Black

    62% 39.49% £3.20

     

    Rates apply from 6 April 2020

    Which? Customer Score: Our rating for customer satisfaction, based on feedback from real customers. The score is made up of a customer's overall satisfaction with the brand, and how likely they are to recommend that brand to a friend. We surveyed 4,216 members of the general public in September 2019. Our full table includes scores and star ratings for all banks. 

      What rules do banks have to follow on overdrafts?

      Which? has 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;
      • to do more to identify customers who are showing signs of financial and implement a strategy to reduce repeat overdraft use.

      Introducing a flat rate puts prevents banks from making large profits on the backs of the most financially vulnerable. However, the FCA has stopped short of placing a cap on the cost and some of the largest banks are introducing rates as high as 39.9% AER. 

      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 usage 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 message 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 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 are willing to offer you.

      Your bank may 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 have applied for more finance or demonstrated poor money management in other ways.

      But, 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 may 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. And, 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 (though not the other way around).

      How do I pay off my overdraft?

      • Ask your bank to extend your arranged 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 manage your money better. 

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

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