Bank overdraft
An overdraft on your current account is a way of borrowing. You need to manage your money or risk it being withdrawn or having to pay extra charges.
You can ask your bank or building society for this or they may offer one with specific current accounts. They will set the amount of money you can borrow (called your overdraft limit). Spending within your limit is called an ‘arranged’ or ‘authorised’ overdraft.
A bank overdraft can be authorised or unauthorised.
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Authorised overdraft
You arrange this with your bank in advance and agree a limit up to which you can borrow. The money is drawn from your current account. There is no minimum repayment and you can take the money up to your overdraft limit using any of your usual withdrawal methods. -
Unauthorised overdraft
This is where you haven’t agreed an overdraft facility with your bank and have drawn more money out than you have in your account, or if you have taken out more than your authorised overdraft's limit. You will pay extra charges if you do this and these can build up – see below.
Cost of borrowing
Like other money you borrow, you will usually have to pay interest on your overdraft. Your bank or building society will tell you how much this will be.
It may vary according to a reference rate (for example the Bank Rate or LIBOR), but your bank or building society should always be able to tell you the interest rate you are paying. If they have given you a variable rate, they must tell you in advance if they plan to vary the rate.
Be aware that a bank or building society can reduce your overdraft limit or demand you pay back your overdraft in full at any time. They may also do this if they are concerned about your ability to repay the debt, or are reassessing their own risks.
Charges for an unauthorised overdraft
If you accidentally or deliberately spend beyond your authorised overdraft limit, your bank or building society will probably charge you extra.
These charges usually come in two forms:
- a flat fee for every transaction you have made over your agreed limit; and
- a higher interest rate on the money you have borrowed above the limit.
You may also be charged daily or monthly fees. These charges can cost you a lot of money over time. You should try to avoid going into unauthorised overdraft. If you see that you are getting close to the limit you have been given, try to reduce your spending or talk to your bank or building society about your situation.
In July 2007 the Office of Fair Trading (OFT), seven UK banks and one building society began a test case about unauthorised overdraft charges for personal current accounts. The FSA is not party to the test case, but we have an interest in it, and give support where needed – see Need to know. You can find up-to-date information about this test case and what it means for you on our and the OFT’s websites – see Related links.