Overdraft Debt UK — What Happens and How to Clear It
Updated July 2026 · 9 min read
By Hamid Ali · MSc Accounting & Finance · ACCA in progress · Founder of DebtShift
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Get My Free Debt Plan →Living in the overdraft for three years. Every payday the money landed, the bank took most of it straight back, and by the end of the week it was overdrawn again. Running on a treadmill that was slowly speeding up. Never getting ahead — just more in debt.
Overdraft debt is one of the most overlooked debt problems in the UK. It doesn’t feel like real debt — it feels like your account just being a bit short. But the interest charges, the credit file impact, and the way it traps you month after month make it just as damaging as any credit card.
Arranged vs Unarranged Overdraft — The Key Difference
An arranged overdraft is one you agreed with your bank in advance. You have a set limit, say £500, and pay interest only on what you use, at a rate that’s clearly advertised.
An unarranged overdraft is when you spend beyond your agreed limit or go overdrawn without any arrangement at all. If your account is overdrawn beyond your arranged limit, the bank may refuse payments such as direct debits or standing orders — meaning missed rent, missed loan payments, missed bills, all because of an overdraft you may not have realised you were in.
Under FCA rules introduced in 2020, banks are no longer allowed to charge higher fees for unauthorised overdrafts than for arranged ones. Daily or monthly fees for unarranged overdrafts have largely been abolished, and interest rates must be clearly advertised. That was a big change — before 2020, unauthorised overdraft charges could spiral fast. But the reform didn’t make overdrafts cheap. It just made the costs clearer.
What Does an Overdraft Actually Cost in 2026?
Most UK high street banks now charge a single annual interest rate (EAR) on overdrafts. Here’s what the major banks charge as of 2026:
UK Overdraft Interest Rates — 2026
Barclays: 35.0% EAR
HSBC, Lloyds, Halifax, Santander: 39.9% EAR
NatWest: around 39.5% EAR
Monzo / Starling: tiered rates based on credit profile — typically 15%–39% EAR
At 39.9% EAR, a £500 overdraft you sit in for a full year costs you around £200 in interest alone. Most people in a persistent overdraft are paying well over £100 a year for the privilege of being skint.
How an Overdraft Affects Your Credit Score
An overdraft appears on your credit report as a debt. Anyone in their overdraft will see the amount they owe on their credit report — if you don’t use it, it shows a zero balance.
Exceeding your authorised limit is typically recorded as a missed or late payment on your credit file. Repeated use at or near the limit signals to lenders that you’re consistently reliant on overdraft borrowing, which can affect affordability assessments on anything else you apply for.
For mortgage applications especially, a persistent overdraft sends a warning signal to lenders — it suggests you’re regularly spending more than you earn, which is the last thing you want them to see. Use our free DTI Calculator to check how your overdraft is affecting your lending position.
What Happens If You Can’t Pay Back Your Overdraft
Stage 1 — Interest keeps mounting. The longer you stay overdrawn, the more expensive the debt becomes. If you’re only using your overdraft occasionally and clearing it when you get paid, the cost is manageable. If you’re permanently overdrawn and never clearing it, you’re paying interest on interest every single month.
Stage 2 — The bank restricts your account. If you’re consistently exceeding your overdraft limit or missing payments, your bank can reduce your overdraft limit, suspend it entirely, or close your account and demand full repayment. They must give you notice, typically 30 days, for a reduction or removal of an arranged overdraft.
Stage 3 — Debt referred to collections. If you can’t repay the overdraft after the bank closes your account, the debt is often passed to an internal collections team or sold to a debt collection agency. At this point it’s treated the same as any other unsecured debt — you’ll receive letters and calls requesting repayment.
Stage 4 — Default and CCJ possible. If the debt remains unpaid, the bank or debt collector can issue a default notice on your credit file, which stays for six years, and ultimately apply to the county court for a County Court Judgement (CCJ). An overdraft CCJ has the same consequences as any other CCJ.
Is Overdraft Debt a Priority Debt?
No. Overdraft debt is an unsecured, non-priority debt, sitting below council tax, rent arrears, mortgage arrears, and energy bills in terms of urgency. Always tackle priority debts first. But don’t ignore your overdraft either — the interest accumulates fast and the credit file damage is real.
See our full UK debt help guide to understand exactly which debts to tackle in which order.
How to Clear an Overdraft — 5 Strategies That Actually Work
Strategy 1 — Salary redirect method
Open a second basic bank account with no overdraft. Have your salary paid into the new account and pay only essential bills and living costs from it. Transfer a fixed amount each month to the old account to chip away at the overdraft. This breaks the cycle of your wages landing and immediately disappearing into the overdraft hole.
Strategy 2 — Ask for a lower limit
Call your bank and ask them to reduce your overdraft limit by £100 every month. Most banks will do this. It forces you to reduce usage gradually without the shock of a sudden repayment demand — each reduction is a small win.
Strategy 3 — Switch to a 0% money transfer card
Some credit cards offer 0% money transfer deals, transferring cash directly into your bank account to clear the overdraft. You then pay off the card at 0% over 12–24 months instead of paying up to 39.9% EAR on the overdraft. There’s usually a transfer fee of 2–4%. This only works if you qualify and don’t accumulate new overdraft debt afterward.
Strategy 4 — Personal loan to clear the overdraft
A personal loan at a much lower rate than 39.9% is significantly cheaper than staying in the overdraft. Use the loan to clear the overdraft in full, then make fixed monthly repayments on the loan instead. This converts a revolving debt with no end date into a structured debt with a clear finish line. Use our Debt Consolidation Calculator to check if the numbers work for you.
Strategy 5 — Build a small emergency buffer
The most effective long-term solution is a small emergency fund, even £200–£300, held in an instant-access savings account. This acts as a buffer for unexpected expenses that would otherwise push you into overdraft. Building this gradually, even £10 a week, reduces overdraft dependency over time. Use our Emergency Fund Calculator to find your exact target.
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Get My Free Debt Plan →Can Overdraft Debt Be Written Off?
Overdraft debt is unsecured and can be included in a Debt Relief Order (DRO), IVA, or bankruptcy if you qualify. If the debt becomes statute barred, six years from your last payment or written acknowledgment, the creditor can’t take you to court to enforce it. Check our free Statute Barred Checker if your overdraft debt is old, or our DRO and Bankruptcy Checker if you’re considering insolvency options.
Frequently Asked Questions — Overdraft Debt UK
Can my bank close my account because of an overdraft?
Yes. If you consistently exceed your limit or can’t repay the balance, your bank can close your account. They must give you reasonable notice, typically 30 days, and will demand repayment of the outstanding balance. If you can’t pay, the debt moves to collections.
Does an overdraft affect my credit score?
If you only dip into your overdraft occasionally and it clears at the end of the month when you get paid, the usage may not appear meaningfully on your credit report — most banks only send information to credit reference agencies once a month. But a persistent overdraft balance will show as a debt and impact your score.
Can I be taken to court over an overdraft?
Yes. If the bank or debt collector can’t recover the overdraft debt, they can apply to the county court for a CCJ. This is more likely for larger overdraft balances, typically over £1,000, where the cost of court proceedings is justified.
What’s the cheapest way to clear an overdraft?
The salary redirect method costs nothing and breaks the cycle without taking on new debt. If you need to clear it faster, a 0% money transfer card or a low-rate personal loan will save significant interest compared to staying in a 39.9% EAR overdraft.
Should I prioritise my overdraft over credit card debt?
Compare the interest rates. Most overdrafts charge 35–40% EAR, while most credit cards charge 20–25% APR. The overdraft is almost always more expensive, so it should usually be cleared first. Use our Savings vs Debt Calculator to run your exact numbers.
Can I get free help with overdraft debt?
Yes. StepChange (0800 138 1111) provides free regulated debt advice and can help you create a repayment plan that covers your overdraft alongside any other debts. Citizens Advice and National Debtline (0808 808 4000) also offer free help.
DebtShift is an educational platform. This content is for informational purposes only and does not constitute financial or legal advice. For free regulated debt advice contact StepChange (0800 138 1111), National Debtline (0808 808 4000), or Citizens Advice. DebtShift is not FCA regulated.