What is an unarranged overdraft?
When a payment takes you into an unarranged overdraft (also known as unplanned or unauthorised) your bank could charge you:
- Debit interest on the amount borrowed, shown as an equivalent annual rate (EAR), typically around 11% to 20% EAR.
- Daily fees ranging from £5 to £10.
- Monthly fees ranging from £6 to £25.
- Paid transaction fees from £5 to £25 when there aren't enough funds in your account but your bank allows the transaction.
- Unpaid transaction fees from £5 to £30 when there aren't enough funds in your account and your bank refuses the transaction.
Banks have been told to set a monthly maximum charge (MMC) - a cap covering all fees and interest for any unarranged borrowing (it doesn’t apply to arranged overdrafts).
This cap varies from as little as £2 per month at Starling Bank to a hefty £100 at Clydesdale and Yorkshire Banks.
Find out more: Best bank accounts for arranged overdrafts
Banks told to scrap 'unfair' unarranged fees from April 2020
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 eventually stepped in, announcing new rules to fix the ‘dysfunctional’ overdraft market, coming into force from 6 April 2020.
From next year, 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 40%.
Nationwide Building Society
Britain's largest building society was the first to make a move, removing all unarranged borrowing charges and introducing a flat rate of 39.9% APR from 11 November 2019.
The changes mean FlexAccount customers are paying almost double for borrowing £500 for 15 days a month (£6.99 up from £3.58) though charges have come down slightly (by 51p) for FlexPlus and FlexDirect customers.
Text alerts are now automatically sent to your mobile phone number when you enter your arranged overdraft so that you can avoid fees.
HSBC, First Direct and M&S Bank
HSBC has revealed that it will scrap its £5 daily fee for unarranged overdrafts and impose a blanket overdraft rate of 39.9% (APR) from 14 March 2020 for all non-student accounts.
It will also introduce a £25 buffer on its Bank and Advance accounts (Premier customers will continue to benefit from a £500 interest-free buffer and Jade customers will still get £1,000).
HSBC says seven in ten customers who use an overdraft will be ‘better off or the same’ but for customers used to paying between 9.9% and 19.9% on arranged overdrafts this could be a shock to the system.
Other brands in the HSBC banking group, First Direct and M&S Bank, have confirmed that their customers will pay the 39.9% flat rate from March.
Lloyds Banking Group
Lloyds Banking Group scrapped unarranged overdraft fees and monthly usage fees in November 2017, affecting Lloyds Bank, Bank of Scotland and Halifax accounts.
Under the old system, customers who slipped into an unarranged overdraft paid an additional daily fee, plus extra charges for rejected payments.
This was replaced with a tiered system, where you pay different rates depending on how much you're overdrawn by.
Up to £1,250, you pay 1p for every full £6 you're overdrawn. Between £1,250-£2,500 you pay 1p for every full £7 you're overdrawn, plus the lower tier charges.
If you're overdrawn by more than £2,500 you pay 1p for every full £8, plus the lower tier charges.
Lloyds also allows a grace period to help you avoid overdraft fees (if you bring your account back into credit by midnight you don't pay an overdraft fee for that day).
In line with Nationwide and HSBC Group, Lloyds has announced that from 6 April 2020 it will charge a standard rate of either 39.9% EAR or 49.9% EAR depending on how you manage your account management and your credit history. Club Lloyds customers will pay either 27.5% or 49.9%.
Santander removed unarranged overdraft charges from 10 July 2018 on all of its on fee-charging accounts.
This includes the 123 Current Account, 123 Lite Current Account, Select and Private accounts.
For now, the bank’s free accounts - Everyday, Student and Graduate - are still subject to unarranged overdraft fees of up to £6 per day, capped at £50 (down from £95).
However, you can avoid incurring fees by clearing an overdraft by 4pm that same day.
From 6 April 2020, Santander will charge a standard rate of 39.9% EAR for all overdraft borrowing. Only Choice Account customers will pay a lower rate of 29.9% with interest capped at £20 per month.
What other rules do banks have to follow on overdrafts?
The Competition and Market Authority told banks to set and publish a monthly maximum charge for unplanned overdrafts from September 2017, following its retail banking market investigation.
In May 2018, the Financial Conduct Authority published its final report into high-cost credit, after a two-year review, and put forward these proposals to improve understanding and management of overdrafts:
- Online or 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.
- Text message or push notification alerts warning of potential overdraft charges.
- Banning showing overdrafts as 'available funds' to ensure that overdrafts are presented clearly as debt.
Who are the worst banks for unarranged overdrafts?
Comparing total unarranged overdraft costs at a glance is difficult because some banks charge interest, while others apply a fixed daily or monthly fee, and a handful will hit you with a combination of both.
Most banks provide online overdraft calculators or illustrative examples of their charges but to give you a steer, our table below shows you the worst bank accounts if you dip into an unauthorised overdraft by £100 for one week.
|Cost of borrowing |
£100 over 7 days
Monthly usage fee doesn't apply if you've already paid one for using a planned overdraft. Max three unpaid transaction fees per day. From 2 April 2020 TSB will scrap fees for unarranged overdrafts and charge a standard rate of 39.9% EAR for all borrowing.
|Classic and Classic Plus||65%|| |
£6 monthly usage fee; 19.84%; £5/day if £11- £25 or £10/day £25+
|Royal Bank of Scotland |
Charges only apply once you exceed £10 buffer. In any given charging period, you pay a maximum of nine daily unarranged fees and one unpaid item fee. From 27 March 2020 RBS/NatWest will scrap fees for unarranged overdrafts and charge a standard rate of 39.49% EAR (Reward Black/Premier Select customers pay a lower rate of 19.49%)
|Select and Reward||62%||£8 a day||£8 unpaid||£56||£80|
Charges only apply once you exceed £10 buffer. In any given charging period, you pay a maximum of nine daily unarranged fees and one unpaid item fee. From 27 March 020 RBS/NatWest will scrap fees for unarranged overdrafts and charge a standard rate of 39.49% EAR (Reward Black/Premier Select customers pay a lower rate of 19.49%)
|Select and Reward||69%||£8 a day||£8 unpaid||£56||£80|
Charges apply once past £12 buffer. MMC fell from £95 to £50 on 10 July 2018. From 6 April 2020, Santander will scrap fees for unarranged overdrafts and charge a standard rate of 39.9% EAR (only Choice Account customers will pay a lower rate of 29.9% with interest capped at £20 per month).
|Everyday||70%||£6 a day||£10 unpaid |
Data correct at January 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 4,815 members of the general public in September 2019. Our full table includes scores and star ratings for all banks.
How can I avoid unarranged overdraft charges?
Ask your bank if it allows a 'grace period' within which you can transfer funds on the same day to avoid overdraft charges for using an overdraft.
Santander customers have until 4pm to credit their account and avoid unarranged overdraft fees.
At Barclays, Clydesdale and Yorkshire Banks it's 3pm, HSBC gives you until 11.45pm and Lloyds Banking Group brands give you until midnight to avoid a daily overdraft fee for that day.
They may also offer tools and features to help keep overdraft charges to a minimum, although use these with caution as they may not always save you money.
For example, Barclays customers can add a feature called 'Control' to minimise unpaid transaction fees. This costs £8 and can be switched on or off each month.
Payments will still be returned if you don't have enough funds (so you may face penalties from other businesses for missing payments) but once Control is on, you won't incur the usual £8 daily fee when cheques, direct debits and standing orders bounce.
Instead, you'll pay the daily overdraft fee (75p to £5), capped at £35 in a monthly charging period.
Will unarranged overdrafts affect my credit score?
How you cope with an overdraft is important and can affect your credit score. This in turn could have an impact on whether you can get a loan, credit card or mortgage in the first place, as well as the interest you'll be charged.
Your credit report contains details about each of your credit accounts, including any current accounts with overdrafts, as well as credit cards, store cards, loans and mortgages.
Using a pre-arranged overdraft shouldn't negatively impact your credit rating, as long as you don't rely too heavily on it. But, using an unauthorised overdraft on a regular basis could be harmful to your credit score and hinder your ability to borrow.
Find out more: Understanding your credit report
How do I pay off my unarranged 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