Overdraft Debt
An overdraft is easy to slip into and hard to climb out of. Since 2020 banks must charge a single interest rate – often around 40% – and treat an overdraft as debt, which means persistent use is costly and your bank should be offering help.
Why overdrafts are a problem
Because your wages go in and are immediately absorbed by the overdraft, you never see a positive balance. Charges of 35–40% EAR mean a £2,000 overdraft can cost £60 or more a month just in interest.
What your bank must do
The FCA requires banks to identify customers in repeat overdraft use and offer help. If you are struggling you can ask for the interest to be frozen, for a repayment plan, or for the overdraft to be converted into a structured loan with a fixed end date. Banks cannot withdraw a facility without notice if that would cause hardship.
Opening a new basic bank account
If your overdraft is included in a debt solution, open a basic bank account with a different bank first. This protects your income from being taken to repay the overdraft (set-off) and keeps your day-to-day banking separate.
Including an overdraft in a solution
Overdrafts are unsecured and can be included in a DMP, IVA, DRO, bankruptcy or Scottish equivalent.
Frequently asked questions
Can my bank take money from another account to pay my overdraft?
Yes, if both accounts are with the same bank or banking group – this is called set-off. Moving your income to a separate bank prevents this.
Will my bank close my account if I can't repay the overdraft?
It may do once the overdraft is in default or included in a solution. You will usually be offered or able to open a basic account elsewhere.
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