An overdraft can be useful when an unexpected expense appears shortly before payday. However, regularly relying on one can make it difficult to regain control of your bank balance.
Unlike a personal loan, an overdraft does not normally come with fixed monthly repayments or a clear end date. Money entering your account reduces the balance, but everyday spending can quickly push you back into it. Over time, interest may leave you paying more without making lasting progress.
Overdraft borrowing is common. According to the FCA’s Financial Lives 2024 research, 21% of UK adults, equivalent to 11.4 million people, had been overdrawn at some point during the previous 12 months. Around 4.3 million were constantly overdrawn or usually overdrawn by the time they were paid.
If this sounds familiar, the following steps can help you understand how to pay back an overdraft and when to seek overdraft debt advice.
What Is an Overdraft?
An overdraft is a borrowing facility attached to your current account. It allows your balance to fall below £0, meaning you are spending money provided by your bank.
For example, if your account balance is £50 and you spend £100, you would become £50 overdrawn.
There are two main types:
- An arranged overdraft, where your bank agrees a borrowing limit in advance
- An unarranged overdraft, which can arise when your bank allows a payment that takes you below £0 or beyond your arranged overdraft limit. The bank may instead refuse the payment if there is not enough money available
An overdraft is still a form of debt, even when it appears as part of your everyday bank account. You can learn more on our dedicated overdraft debt advice page.
How Does an Overdraft Work?
When money enters your current account, it automatically reduces the amount you are overdrawn.
For example, if your balance is minus £500 and your salary of £1,800 is paid in, your balance will temporarily become £1,300. As you pay your rent, bills and living costs, you may gradually move back into the overdraft.
This is why an overdraft can feel difficult to clear. Your income appears to repay it each month, but you then borrow the money again to cover normal expenses.
Overdrafts usually have:
- A borrowing limit
- Interest charged on the amount used
- No fixed repayment schedule
- A variable interest rate that the bank may change
- A facility that the bank can review, reduce or withdraw
How Much Will My Overdraft Cost Me?
The cost depends on your bank’s interest rate; how much you borrow and how long you remain overdrawn.
Interest is normally calculated daily and added to your account periodically. Your bank should show the applicable annual interest rate in your account terms, statements or mobile banking app.
As an illustration, maintaining an unchanged overdraft balance of £1,000 for 30 days at an effective annual rate of 39.9%, with no interest-free allowance, would cost approximately £28.
This is only an estimate. The amount charged will depend on your daily balance, your provider’s calculation method and whether your account includes an interest-free allowance. Check your banking app, account terms or the provider’s overdraft calculator for a personalised figure.
To understand your costs, check:
- The interest rate on your overdraft
- Your average overdrawn balance
- How many days each month you are overdrawn
- Whether any interest-free allowance applies
- Whether payments are being refused due to insufficient funds
Even if the monthly interest appears manageable, the annual cost can be significant when you remain overdrawn throughout the year.
How Do You Pay Back an Overdraft?
Your overdraft is technically reduced whenever money is paid into your account. However, permanently repaying it requires you to spend less than the money entering the account until the balance stays above £0.
Start by checking your current overdrawn balance and reviewing the previous three months of bank statements. This should help you identify how much you can realistically repay.
You could then follow these steps:
- Decide on an affordable monthly repayment target
- Reduce non-essential spending temporarily
- Move unnecessary subscriptions out of your budget
- Set account alerts to warn you when the balance is falling
- Move payment dates closer to payday where providers allow it
- Use any additional income to reduce the overdraft
- Avoid requesting a higher overdraft limit
For example, if you are £600 overdrawn and can leave an extra £75 in the account each month, you could potentially clear the balance in around eight months, excluding interest.
Our step-by-step budgeting guide can help you calculate what is affordable after essential household costs.
Reduce Your Overdraft Limit Gradually
Once you have reduced the balance, you could ask your bank to lower your overdraft limit in stages. This may reduce the temptation to borrow the money again.
For example, you might reduce a £1,000 limit to £900 after repaying £100.
Do not reduce the limit so quickly that essential payments are likely to be refused. Make sure you have enough money for priority commitments such as:
- Rent or mortgage payments
- Council Tax
- Gas and electricity
- Food and essential travel
- Child maintenance
- Court fines
Overdraft debt is normally treated as a non-priority debt. Although it still needs to be addressed, protecting housing and essential household bills should generally come first.
Could Switching Accounts Help?
Some current accounts offer an interest-free overdraft allowance or a lower borrowing rate. Switching could reduce the cost, but acceptance will depend on the provider’s eligibility and credit checks.
Before switching, compare:
- The new overdraft rate
- The size of any interest-free allowance
- Monthly account fees
- The length of promotional offers
- Whether your existing overdraft must be repaid first
Do not assume a new account will automatically solve the problem. A cheaper overdraft may reduce interest, but you will still need a plan to repay the balance.
Should I Use a Loan to Clear My Overdraft?
A personal loan could replace an overdraft with fixed monthly repayments and a defined end date. However, this is only likely to help when:
- The loan has a lower overall borrowing cost
- The repayments are affordable
- You stop using the overdraft afterwards
- There are no expensive early repayment or arrangement charges
There is a risk that you could clear the overdraft with a loan and then begin using it again. This would leave you managing two debts instead of one.
Avoid applying for several loans in a short period, as repeated applications may affect your credit record. Taking out additional credit is unlikely to be suitable if you are already missing payments or borrowing to cover essential bills.
What Do I Do If I’m Struggling to Pay Off My Overdraft?
Contact your bank as soon as you realise the overdraft is unaffordable. You do not need to wait until the facility is withdrawn or the account defaults.
Explain:
- Why you are struggling
- Your current income
- Your essential household expenses
- Any other debts you are repaying
- What you can realistically afford
Depending on your circumstances, the bank may consider reducing or temporarily freezing interest, agreeing an affordable repayment plan, or providing time to obtain advice. Support is not guaranteed and will depend on an assessment of your circumstances.
The FCA has reviewed how banks support customers in repeat overdraft use, so you may receive messages from your provider about your borrowing. Do not ignore them, as they may provide an opportunity to discuss assistance.
Can Overdraft Debt Affect My Credit Score?
An arranged overdraft does not automatically damage your credit score. However, lenders may be able to see your limit and the amount you are using.
Regularly using most of the available limit could suggest that you are financially stretched. This may affect affordability assessments when applying for a mortgage, loan or other credit.
More serious problems can arise if:
- The bank asks for repayment and you cannot pay
- The account is closed with an outstanding balance
- Payments are repeatedly missed or refused
- The debt defaults
- The bank begins court action
Addressing the overdraft early may reduce the likelihood of longer-term consequences.
What If I Have Other Debts as Well?
An overdraft may be only one part of a wider debt problem. You could also be managing credit cards, personal loans, Buy Now, Pay Later agreements or household arrears.
In this situation, repaying the overdraft alone may not address the reason you are short of money every month.
Start by listing:
- Every creditor
- The outstanding balance
- The required payment
- The interest rate
- Any missed payments
You can then review the available debt solutions. Depending on your circumstances, an overdraft may be included in a Debt Management Plan or an Individual Voluntary Arrangement.
These options have different risks, eligibility requirements and effects on your credit file. A debt solution should only be considered after your full financial circumstances have been assessed.
What Should I Do Now?
Paying off overdraft debt starts with understanding how much it is costing, creating a realistic budget and preventing the balance from increasing.
If you can afford to reduce it gradually, set a monthly target and monitor your progress. If there is no money available after essential costs, contact your bank and seek overdraft debt advice rather than taking out more credit.
My Debt Plan can review your income, expenditure and debts before explaining the options that may be available.
Get debt help online or speak to our team for a confidential conversation on 0161 464 0870.
