The Top Overdraft Bank Accounts

When you have less cash in your checking account than you need, you can use a credit facility called an overdraft to borrow the difference.

The interest and fees associated with overdrafts used to fall into two categories:

Authorized or formal overdrafts are prearranged with your bank up to a predetermined limit and are subject to periodic reviews.

When you go overdrawn beyond your arranged overdraft limit, or (if you don't have an arranged overdraft) when your balance drops below zero, you have what are sometimes called "unauthorised" or "informal" overdrafts.

Since April 6th, 2020, banks are prohibited from charging customers a higher interest rate for unarranged overdrafts than for arranged overdrafts. Overdraft fees, both daily and monthly, are also prohibited from being charged by banks.

A small number of financial institutions, however, will still charge a fee if a payment (such as a direct debit) is made but then returned because insufficient funds were available.

There is a maximum of three unpaid transactions per month (including standing orders, direct debits, and checks) that will incur a £10 fee from TSB and a £2 fee from NatWest Group. 15 for each transaction that has not been paid (but only once per billing cycle).

Overdrafts at low or no cost from select banks

In order to conform to the new Financial Conduct Authority (FCA) rules on overdrafts, banks and building societies altered their overdraft structure as of April 2020.

Many financial institutions charge borrowers as much as 39% If you think you might need an overdraft occasionally, you can find better rates than 9% AER elsewhere.

Based on a scenario of borrowing £500 for seven days, this table displays the current accounts with the lowest overdraft fees (excluding accounts reserved for private banking customers).

Accurate as of 30 March 2023

Which customer satisfaction rating: how we rate how satisfied our customers are. Overall customer satisfaction and the percentage of satisfied customers who would recommend the brand to a friend make up the score. In the months of September and October of 2022, we polled 4,525 members of the general public. We have compiled a complete ranking of the best and worst bank accounts, complete with ratings and star systems.

There are some banks that will let you borrow up to a certain amount without charging you interest.

  • Further, the Money Helper bank account fees and charges tool can assist you in comparing most banks' current account offerings in terms of the fees and charges associated with their various services and features.  

Explanation of the top institutions for overdrafts

Overdraft at Starling of 15% EAR if credit is excellent.

Starling, a bank that operates exclusively on mobile devices and the Internet, has the market's lowest overdraft fees, but only for customers with excellent credit.

Overdraft fees at Starling range from 15% to 35% EAR depending on your credit score, up from a flat 15% before April 1, 2020.

With this method, Starling Bank determines individual interest rates based on the perceived risk that a customer will be unable to repay a loan.

Overdraft fees for a £500 loan for seven days went from £1 to 25% of the loan amount. 35 to £2 19, while the highest rate-payers (35%) will be subject to a £2. 97

If approved, you can get an overdraft of up to £5,000.

Before applying for the account, check your chances of being approved for an overdraft using the bank's online eligibility tool.

Rates are reviewed monthly (though your rate will only change once in any 12-month period) and determined with the help of credit reference agencies TransUnion and Equifax.

When you use your overdraft, the bank will notify you immediately, and you can check the number of days you've been overdrawn and the total amount of interest you've incurred in the app.

The Starling platform has been endorsed by Which? Our 2022 survey found that its current account features, which include fee-free spending and international cash withdrawals, made it the bank with the highest customer satisfaction.

  • Discover what you can do to get better credit rating

18% EAR overdraft at Triodos

Up to £2,000 can be borrowed through Triodos' arranged overdraft service at a fixed rate of 18% EAR.

It costs £3 per month to maintain the account as a checking account.

It does not offer unarranged overdrafts, so if there are insufficient funds, the transaction will be declined.

Triodos calls itself a sustainable bank because it wants to put money toward improving society, the environment, and culture.

Due to a small sample size, we were unable to assign it a customer score in 2022, but it received a perfect score in our 2021 survey. But it hasn't joined the APP scams code of conduct for voluntary authorized push payments.

Free overdraft from £250 to £500 with First Direct

For qualifying customers, First Direct will extend a £250 interest-free overdraft on its standard current accounts. Borrowing over £250 will result in a 39 9% EAR

In the past, its 15% overdraft fee was the highest in the industry. 9% EAR For some consumers, this adjustment has resulted in a more than doubling of their borrowing costs.

Before applying for the account, check your chances of being approved for an overdraft using the bank's online eligibility tool.

As a result of their excellent performance in our customer satisfaction survey in 2022, First Direct has earned our recommendation as a service provider.

Keep in mind that First Direct's parent company, HSBC, provides deposit insurance of up to £85,000.

  • In this article, we'll break down exactly how the Compensation Program for the Financial Sector guards your savings from loss

An overdraft fee of 19% EAR is applicable for some Monzo customers.

Instead of charging 50p per day for overdrafts, Monzo now uses a variable rate between 19% and 29% EAR, based on your TransUnion credit score.

Borrowing amounts of up to £2,000 are available from the bank. Overdraft limits are flexible and can be adjusted directly in the mobile app. Overdrafts can be terminated by repaying the original loan plus interest.

Check your chances of being approved for an overdraft using the bank's online eligibility tool before submitting an account application.

When deciding on an overdraft fee, Monzo consults TransUnion.

No one's overdraft rate is automatically adjusted, so if your credit score rises you'll have to pay off your overdraft and reapply for a better rate.

Monzo came close to being a Which? Recommended Bank in our 2022 survey of banks, but ultimately fell short. Not a Preferred or Authorized Push Payment (APP) Scams Code Provider because:

No Interest for a Whole Year on All National FlexDirect Purchases

We haven't included the Nationwide FlexDirect account in our comparison table because after the first year, the overdraft interest rate is 39.99%. 9% EAR

Before applying for a building society account, you can use their online eligibility tool to determine if they are likely to grant you an overdraft.

If you don't think you can pay off your overdraft in a year, this isn't the account for you.

You are not eligible for the interest-free overdraft if you have held a FlexDirect account within the past 12 months.

Our national survey in 2022 gave it a passing grade.

You can earn interest on your balances of up to £1,500 for the first year if you deposit at least £1,000 each month into this account, and 0% after that unless you maintain a positive balance. 25%

Overdrafts at the worst banks

We previously ranked the worst banks for overdrafts, considering both interest rate and fees.

However, since the FCA's new rules took effect in early 2020, many banks have increased their overdraft fees to 39. Some banks charge as much as 9 percent (Bank of Scotland, First Direct, Halifax, Lloyds, Nationwide, TSB), while others charge even more (Danske Bank charges some customers 40 percent). 36% compared to Santander's 39% 94%)

If you frequently use your overdraft at these financial institutions, you may want to look into transferring your account to a different bank that offers a lower overdraft rate or a larger interest-free buffer.

Talk to a debt-advice charity like StepChange if you've been using your overdraft for a while.

In what ways are banks bound by regulations regarding overdrafts?

We have repeatedly reported that the fees associated with an unarranged overdraft can be more expensive than taking out a payday loan, and we have been advocating for banks to bring these fees in line with the fees associated with an arranged overdraft.

Eventually, the Financial Conduct Authority (FCA) stepped in and announced new rules to fix the "dysfunctional" overdraft market, which will go into effect on April 6, 2020.

Because of this, financial institutions must do the following:

  • Overdraft fees should be equal for both arranged and unarranged overdrafts.
  • Getting rid of the overdraft facility's fixed daily or monthly fees.
  • Overdrafts should be priced using a standard annual interest rate so that consumers can easily compare the product to others.
  • improve the ability to spot clients who are experiencing financial difficulties, and devise a plan to cut down on their reliance on overdraft services.

Banks can't make huge profits off of the backs of the poorest people in society if a flat rate is implemented. The FCA didn't put a price cap in place, so some of the biggest banks raised their rates to 40 percent. 36% EAR

In this way, the most financially vulnerable people are protected from being used as a profit center by banks. The cost of borrowing money, however, will skyrocket for some customers.

Additional Strategies for Overdraft Improvement

The FCA has identified and implemented other measures to increase customers' engagement with their overdraft use and charges, in addition to requiring banks to eliminate unarranged overdraft fees by April 2020.

In 2016, the FCA directed the Competition and Markets Authority (CMA) to conduct an investigation into the retail banking market in an effort to:

  • In May 2020, the CMA announced that five current account providers had refunded £47m in two years for violating this rule by not sending text messages or push notification alerts when an overdraft was about to occur.
  • Apps and websites that determine if you qualify for overdrafts without damaging your credit
  • Cost of overdrafts can be calculated online based on user behavior.
  • prohibiting the presentation of overdrafts as 'available funds' to protect consumers' understanding of their debt status

For more information on overdrafts and other forms of expensive credit, check out the FCA's concluding report.

Use of an overdraft a bad idea?

To begin, the tables in this guide show that not all overdrafts have the same fees.

Second, an overdraft allows you a great deal of leeway in terms of how much and how often you borrow up to your limit and how quickly you can pay it back without penalty.

However, they are a very pricey method of borrowing over the long term, especially if your bank assesses a daily or monthly fee in addition to debit interest. Long-term borrowers are better served by an unsecured personal loan.

For how much of an overdraft am I eligible?

When opening a bank account, your overdraft limit will typically be determined based on your personal financial situation.

Financial institutions rarely provide automatic overdraft services, but when they do, they look at factors like your income and expenses, credit history, and employment history to determine how much they are willing to lend you.

At a later date, either temporarily or permanently, your bank may agree to increase your overdraft limit. A bank may decrease or eliminate an overdraft facility at any time.

Credit scores are affected by overdrafts.

However, when deciding whether or not to extend credit to you, lenders have varying policies regarding overdrafts.

Lenders typically request a borrower's most recent three months of bank statements when a mortgage application is being processed.

Unless you have applied for additional financing or otherwise demonstrated poor money management, infrequently using an arranged overdraft shouldn't cause any problems.

However, your chances may be ruined if you regularly incur overdraft fees or are late with your payments.

Can I change banks even though I'm overdrawn?

You shouldn't let being overdrawn prevent you from Change of Account Switching - it should motivate you to look around, as people who rely on overdrafts stand to benefit more than average from making a switch.

Current Account Switching Service (CASS) allows you to switch banks within seven days, and your overdraft can be transferred with you, although your new bank may not provide you with the same overdraft limit.

If you have an existing overdraft and are unable to transfer it to your new account, you will need to repay some or all of it before making the switch.

Do joint bank accounts qualify for overdrafts?

Most Shared checking and savings accounts are operated on an "either-to-sign" basis, wherein both signatories need not be present for a transaction to be authorized.

Most importantly, this means that any account holder can adjust their overdraft limit. Furthermore, everyone is on the hook for the overdraft, regardless of who actually racked up the charges.

If you have other accounts with the bank, they can transfer funds from those to pay off the debt on the joint account (but not the other way around).

Just how do I settle my overdraft?

  • If you're in a tight spot, you can ask your bank to let you stay overdrawn or to stop charging you interest.
  • Keep tabs on your finances through regular balance checks and careful spending by using your mobile device or online banking.
  • If you want to avoid overdraft fees, sign up for text alerts that will let you know when you're getting close to reaching your limit.
  • Move your standing orders and direct debits to a more convenient time, preferably right after you get paid.
  • You should look for a cheaper bank that either does not charge interest on overdrafts or has lower overdraft fees.
  • If your overdraft is too large to pay off quickly, you should transfer the balance to a credit card that does not charge interest. Read our guide to study the fundamentals of successful switching
  • Sign up for a free account with lack of an overdraft option if you believe that doing so will improve your financial situation

Take a look at our debt management manual to learn more.

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