An overdraft is meant for short-term use, but many people end up living in it permanently. Since 2020, most banks charge a single high interest rate on overdrafts, so it can be an expensive way to borrow.
The short answer
- Banks must act if you show signs of persistent overdraft use.
- Ask about reducing or freezing interest and a plan to clear the balance.
- Banks can use money in your account to pay your overdraft (right of set-off).
- Opening a basic bank account elsewhere can protect your income.
- Overdrafts can be included in a DMP, IVA, DRO or bankruptcy.
How do I reduce my overdraft?
- Ask your bank to convert it into a low-interest loan or a repayment plan.
- Set up a small regular payment to reduce the limit gradually.
- Look for cheaper borrowing only if you can repay it. Don’t move debt around without a plan.
What is the right of set-off?
If you owe your bank money, it can usually take money from your other accounts with the same bank to pay it. That could include your wages. If you’re in difficulty, opening a basic bank account with a bank you don’t owe money to keeps your income safe for priority bills. See bank accounts for an IVA.
What if I have other debts?
If your overdraft is part of wider problems, a debt solution may help. Overdrafts are unsecured and can be included in a DMP, IVA or DRO.
Common questions
Can my bank take my wages to pay my overdraft?
If your wages go into an account with the same bank, it can usually use them under the right of set-off. A separate basic account can protect them.
Will my bank close my account if I'm overdrawn?
It may, especially if you enter a debt solution. Open a basic account elsewhere first.
Does an overdraft affect my credit score?
Overdraft use is reported to credit reference agencies. Staying over your limit or missing payments can harm your score.
Getting help
You don’t have to deal with debt on your own. Free, impartial advice is available from MoneyHelper, StepChange and National Debtline. If you want to talk through whether a formal solution such as an IVA could be suitable, you can also get in touch with us.