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Understanding overdrafts

How to clear your overdraft more quickly

Tim Heming
Written by  Tim Heming
Jonathan Leggett
Reviewed by  Jonathan Leggett
4 min read
Updated: 30 Jan 2025

While overdrafts can offer short term cashflow to manage your finances, they might also charge interest – which could make them expensive. Our guide explores how to pay off your overdraft fast

Key takeaways

  • Consider switching current accounts to find a lower interest overdraft

  • Watch out for transfer fees when transferring funds from a credit card to pay off the overdraft

  • Reach out to your bank as they might have a more manageable borrowing solution

Woman working out payments

What is an overdraft?

An overdraft is what happens when your current account dips below zero. It’s often called going into the red and means you’re spending more than you have available and you’re borrowing from your bank.

An overdraft can be a convenient buffer for those unexpected expenses, but it's not without its costs. An authorised overdraft comes with a pre-agreed limit and a fixed interest rate, which means you know up front how much you can spend and what the charges will be.

It can sometimes be possible to get a 0% overdraft, which means you won’t face interest charges for going overdrawn.

However, there are no guarantees. It is down to the discretion of the account provider whether they want to offer you a 0% overdraft and how long it might last.

How much will my overdraft cost me?

The cost of your overdraft depends on the terms and conditions of your current account.

Since April 2020, banks have been required to simplify overdraft fees into a single annual interest rate, thanks to the Financial Conduct Authority (FCA) taking action against exorbitant overdraft charges.

This has made it much easier to understand and compare the costs across different accounts, but it doesn’t mean overdrafts are cheap. Typical interest rates range from 15% to 40%.

Interest accumulates daily, so the longer you remain overdrawn, the more you'll end up paying. There are no restrictions on repayment amounts, so you can clear as much or as little of the overdraft as you like.

If you find your overdraft too costly, it might be time to consider switching to a provider with more favourable terms or exploring alternative borrowing options.

How can I pay off my overdraft fast?

Paying off your overdraft can be approached in several strategic ways:

  • Switch to a cheaper overdraft provider: Try shopping around among current account providers to find a cheaper overdraft. You might even find one offering 0% for an initial period. As long as you’ve used your overdraft responsibly and have a good credit rating, it should be possible to switch – even if you’re overdrawn

  • Consider a money transfer card: A 0% money transfer card allows you to move funds from a credit card into your current account – then use the cash to pay off your overdraft. There will be a one-off transfer fee to shift the debt and try to pay off the money transfer card before the end of the 0% period when interest will start to be charged

  • Take out a low-rate personal loan: If you’ve built up a sizeable overdraft and other debts totalling £1,000 or more, a low-rate debt consolidation loan could help. Look for a loan that charges a lower rate than your overdraft interest rate (sometimes known as APR), and use it to pay off your overdraft and then pay back the loan in instalments over 12 months or more

  • Use your savings to pay off your overdraft: It might seem counterintuitive to dip into your savings, but if the interest rate on your overdraft is higher than the interest you're earning on your savings, it could make financial sense

  • Get serious about budgeting: A thorough review of your monthly spending can reveal areas where you can cut back and save money, which can then be used to reduce your overdraft

How long do I have to pay off my overdraft?

Overdrafts don't come with a set repayment schedule like loans do, which means there's technically no deadline for repayment.

However, due to the daily interest charges, it's in your financial interest to clear the balance as soon as possible.

Keep in mind that the terms of your overdraft can change at the discretion of the bank, which can make it an unstable form of borrowing.

This means that while switching to a current account offering a low interest or 0% overdraft can be a good idea, it’s still advisable to clear your debt quickly because the rate is not guaranteed.

Will I have to pay interest on my overdraft balance?

Unless you're lucky enough to have a 0% overdraft agreement, you will accrue interest on the amount you're overdrawn.

Some banks charge as much as 40% in annual interest, which can be steeper than the rates for credit cards and personal loans. And since interest is charged daily, it can quickly add up.

Does going into my overdraft affect my credit score?

Using your overdraft occasionally is unlikely to have a significant impact on your credit score.

In fact, regularly clearing your overdraft can show lenders that you're a responsible borrower, which could potentially improve your credit rating.

However, consistently exceeding your overdraft limit can be a red flag to creditors, indicating financial difficulties and potentially harming your credit score.

What happens if I use an unauthorised overdraft?

If you go into the red without an agreement with your current account provider you have used an unauthorised or unarranged overdraft.

Unauthorised overdrafts are best avoided, Interest rates can be higher than authorised overdrafts and you may also face a penalty fee from your bank if transactions are rejected.

If you're frequently in an unauthorised overdraft, you also risk damaging your credit rating. If you think you might need to use an overdraft on your current account, always check the terms and conditions to make sure it is authorised first – and if not, contact your account provider to see if it can be arranged.

What happens if I can’t pay off my overdraft?

If you find yourself struggling to pay off your overdraft, it's crucial to contact your bank as soon as possible. They may be able to assist you in finding a more manageable borrowing solution.

If you are struggling to pay off your overdraft and have debt worries, free advice is available from charities such as Citizensadvice.org.uk / 03444 111444, Nationaldebtline.org / 0808 8084000 and Stepchange.org / 0800 1381111.

Is it sensible to take out a credit card or a loan to pay off my overdraft?

Taking out a credit card or a loan can be a sensible move if it means you'll be paying less in the long run.

A 0% or low interest money transfer card can be a strategic way to clear your overdraft, but it's imperative to pay off the balance before the 0% period expires.

When considering a personal loan, ensure that the APR is lower than your overdraft's and factor in the loan term and total cost before making a decision.

While a loan can reduce the interest rate and make payments more manageable, you are locked into the agreement.

Overdrafts can be paid off at any time, so if you’re likely to receive a lump sum in the near future, a loan might not be the best option to clear your debt.

Can I still switch current accounts if I am in my overdraft?

Yes, switching current accounts is still possible even when you're overdrawn, provided the new provider offers a suitable overdraft facility.

The Current Account Switch Service guarantee ensures a smooth transition. A credit check will be conducted, and while being overdrawn won't necessarily prevent approval, an unauthorised overdraft could complicate matters.

Kara Gammell
Kara Gammell
Personal Finance Expert

What's the best way of managing an overdraft?

“An overdraft can be useful for short term cashflow issues, but shouldn’t be part of your long term borrowing plan. Interest rates can be high and even if you get a 0% rate it’s down to the discretion of the account provider whether it lasts.

"The good news is there are several ways of clearing your overdraft. But whatever you do, don’t ignore the problem, or it will only escalate.”

Other useful guides

For more information on managing your finances, consider reading our other guides:

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