Best banks if you’re overdrawn

If you’re often overdrawn, but would rather not be, switching to a bank that doesn’t penalise you quite so harshly can be a good place to begin making your way ‘back into the black’.

This is because, when you are not forking out interest charges and fees, anything that is paid into your account goes towards paying off your debt instead.

And, as competition within the current accounts market has stepped up since the seven-day switch guarantee was introduced by the Payments Council in September last year, now’s a great time to move your money.

Here’s a look at the best bank accounts if you’re overdrawn.

Overdraft amount: Any

There are a few accounts which will charge you nothing at all for being overdrawn – but for a limited time only.

For example, the Nationwide FlexDirect account offers 0% interest on your overdraft for the first 12 months. After the year is up, it’ll then cost you 50p a day for as long as you are sitting in your agreed overdraft. If you venture into unarranged overdraft territories it will cost you £5 a day with a cap at £60 a month.

This account then, lends itself best to those who can clear their overdraft completely in the first 12 months. And if you can do it sooner and get into positive territory, a 5.00% AER applies to all credit balances between £1 and £2,500 for the first 12 months too.

You’ll have to pay at least £1,000 a month into the account to qualify but there’s no monthly fee.

With the Santander 123 Current Account you’ll get an interest-free arranged overdraft for the first four months when you use its dedicated switcher service. After that (or if you don’t use the switcher service), you’ll be charged £1 a day, capped at 20 days in a month. This account comes with a monthly fee of £2 and requires you to pay in at least £500 each month.

Again, if you then manage to clear your overdraft, you’ll start earning interest on credit balances. On balances between £1,000 and £1,999 you’ll earn 1.00% AER, on balances between £2,000 and £2,999 you’ll get 2.00% AER and on £3,000 to £20,000 you’ll earn 3.00% AER.

Overdraft amount: Up to around £250

Some accounts offer a fee-free overdraft with no time limit – but impose a cash limit instead.

For example, the First Direct 1st Account comes with a £500 formal overdraft as standard, the first £250 of which is interest-free. Beyond the initial £250, First Direct will charge you an overdraft rate of 15.9% EAR.

Better still, the internet-only bank will give you £100 if you switch to its 1st Account and even an additional £100 if you decide to leave within 12 months. This is on the condition you pay in £1,000 a month.

If you don't pay in at least £1,000 a month there is also a £10 monthly fee - unless you have another product with the bank, such as a savings account or mortgage.

The RBS Select Platinum Account also charges nothing on the first £250 of your arranged overdraft, but comes with a monthly fee of £16. And anything beyond the first £250 is charged at a steep rate of 19.24% EAR.

Both the Barclays Bank Account and the Co-operative Bank Current Account Plus offer a £200, fee-free, arranged overdraft, but charge 19.30% and 18.90% EAR respectively, beyond that point.

With Barclays, you’ll only get the free £200 overdraft if you add one or more ‘packs’ to your account, starting at £6 a month. There are no such strings attached to the Co-op’s free £200 overdraft, but you will have to deposit at least £800 into the account each month.

Overdraft amount: More than £250

If you regularly go overdrawn by more than £250 – but not by far – an account that charges just one low rate of percentage interest on all of your debt could be a better solution.

For example, the Clydesdale and Yorkshire Banks' Current Account Direct has one low overdraft rate of 9.90% EAR, as long as you credit your account with at least £1,000 each month.

And if you change your ways and start living in the black rather than the red, the accounts also pay 4.00% AER on credit balances up to £3,000 until March 2015, as Rachel Wait explains here.

Check your credit score

Remember that you won’t necessarily get the overdraft rate – or limit – you see advertised. And the new bank could even refuse your application to switch overdrafts.

Just like with any other form of borrowing, success of switching your overdraft to a new bank will depend on your credit score. The better this is, the better deal you’re likely to get. You can use our credit monitoring channel to check your score. If you find a lower score than you’d hope for, have a read of this: Credit scores - why they're important.

Switch today!

When you’re ready to switch, you’ll find the whole process is quite painless. According to fresh figures from the Payments Council, 306,000 people left their current account provider for a new one in the last three months of 2013 – that’s almost a fifth (17%) more than in the same period in 2012.

What’s more, it found that 99.6% of switches took place in seven working days.

If one of the accounts we’ve looked at has piqued your interest, you could apply today via our current accounts switching hub and be with your new provider as early as next week.

Not quite sold? Then watch Clare Francis explain in two minutes just how easy it is to switch:

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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