How to cut high overdraft charges

Overdraft charges cost 9.7 million Brits a staggering £1.4billion each year, new data reveals. We look at how much you could be overpaying and how to avoid high interest

Overdraft charges, interest rate financial and mortgage rates concept
(Image credit: Getty Images)

Overdraft charges are costing people an average of £697 each day, according to new data. 

TotallyMoney revealed that one in five current account customers are finding themselves overpaying every year to popular high-street lenders, who are charging daily interest of between 35%-39.94%. 

This means that the average customer will have to pay £278 in interest each year to big banks. Those who spend about 20 days overdrawn on £1,000 will be overpaying £262.30 in overdraft interest charges. 

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Effective overdraft charges have crept up by 2.07% from 20.85% to 22.92%, according to the Bank of England, which makes overdrafts an expensive way to borrow. 

It costs Brits around £1.4billion per year, and with the already rising cost of living, high utility bills and council tax, it can become a massive strain on your finances. 

Rachel Springall, finance expert at Moneyfactscompare.co.uk said: “Overdraft charges have changed considerably over the past four years, due to a ban on flat fees by the FCA. Current accounts can charge up to 40% AER on arranged overdrafts, so it’s wise for consumers to shop around to find a competitive tariff if they think they will dip into it often.”

We look at what different overdraft charges for big banks are and what alternatives you can use to borrow money. 

Overdraft charges for different banks 

When you use your overdraft, you are getting into debt either for short-term borrowing purposes or for emergencies. This essentially works like a loan, which you have to pay back and make sure that you don’t go over your limit. 

Alastair Douglas, CEO of TotallyMoney calls overdrafts a “ghost debt”, as there’s “no separate card, account, or app — and if you’ve been with your bank for years, you might not remember ever applying for one.”

But the repercussions of this could be that “you might not even really notice if you’re using it, especially if you don’t regularly check your bank statements”.

“So it’s really important that you treat it like any other form of borrowing, use it responsibly, and keep an eye out for cheaper and better alternatives,” says Douglas. “You might not realise it, but some high street banks are charging overdraft customers almost 40% interest, making them one of the most expensive mainstream ways to borrow.”

We look at what different high street lenders and challenger banks are charging overdraft customers:

Swipe to scroll horizontally
BankAuthorised rate
Santander overdraft charges39.94%
HSBC overdraft charges39.90%
Lloyds overdraft charges39.90%
Halifax overdraft charges39.90%
Nationwide overdraft charges39.90%
First Direct overdraft charges (first £250 free) 39.90%
NatWest overdraft charges39.49%
Barclays overdraft charges35.00%
Starling Bank overdraft charges15% - 35%*
Monzo overdraft charges19% - 39%*

*Subject to credit status

Source: Moneycomms.co.uk

It’s “easy to fall into the habit of relying on your overdraft month after month and the high cost just puts even greater pressure on your monthly finances”, according to Andrew Hagger, personal finance expert at Moneycomms.co.uk

Hagger recommends using a credit card instead of an overdraft as it’s a “smarter and more cost-effective way of managing your cash flow”. 

Moneycomms.co.uk has calculated a range of overdraft borrowing costs and compared them to credit cards. According to their analysis, someone spending 10 days £1,000 overdrawn would have to pay £131.16 per year, while the cost of borrowing on a credit card would be £81.84. 

It’s also worth noting that some credit cards provide interest-free periods of up to 56 days, which means that if they pay their balance in full every month, no interest will be charged. 

Swipe to scroll horizontally
Borrowing amount and termOverdraft interest (39.9%)Credit card interest (24.9%)
£500 x 10 days per month£65.52£40.92
£750 x 10 days per month£98.40£61.44
£1000 x 10 days per month£131.16£81.84
£1500 x 10 days per month£196.80£122.76
£2000 x 10 days per month£262.32£163.68

 Research conducted by Moneycomms.co.uk on 12th March 2024 

By avoiding expensive overdraft fees, customers will be able to “get rid of debt quicker, save money and start moving forwards,” according to Douglas.   

Alternatives to avoid overdraft charges  

Here are some ways you can avoid overpaying on your overdraft charges and make your money go further: 

If you have savings in your bank account, it’s worth using them up to clear your overdraft. This way, you can get a much lower interest rate on the amount you have tucked away than what you currently owe. 

It’s important to make sure that you read the small print on overdrafts, especially if you’re getting an interest-free one. According to Douglas, “some accounts like the HSBC Premier will require you to have £50,000 of savings or a £75,000 salary”, or even ask you for a credit check – but a worrying 42% of applicants have been refused an overdraft, so make sure you’re on the right track to avoid falling into one of these traps. 

Springall recommends using a money transfer card for those customers who are worried about not being able to get back into the black quickly.  

This will let you shift your cash to your bank account to clear your overdraft. Usually, you get 0% interest-free periods of up to 12 months, but with a one-off transaction charge which comes to around 4%. 

Springall says, “The lowest fee charged on an interest-free money transfer deal comes from the Capital One Balance Transfer Mastercard, with its 12-month introductory for a fee of 2.90%, so a £500 transfer could cost £14.50. This could be cheaper cost compared to sitting overdrawn for more than a month.”

What to do if you’re worried about debt 

Though everyone will have a different attitude surrounding financial resilience, Springall says that it’s important to be open when it comes to money and seek help. 

She adds: “There are many ways for consumers to change their mindset when it comes to money, whether it be making a simple income and expenditure breakdown, switching a personal financial product or just having a conversation with a family member or friend, small steps can make a big difference. 

“During difficult times, it is also a wise decision for consumers who are struggling to approach a debt advice service for support before their situation gets worse, such as StepChange, a debt advice charity.

Oojal Dhanjal
Staff writer

Oojal has a background in consumer journalism and is interested in helping people make the most of their money. Before joining MoneyWeek, she worked for Look After My Bills, a personal finance website where she covered guides on household bills and money-saving deals. Her bylines can be found on Newsquest, Voice Wales, DIVA and Sony Music and she has explored subjects ranging from luxury real estate to the cost of living, politics and LGBTQIA+ issues. Outside of work, Oojal enjoys travelling, going to the movies and learning Spanish with a little green owl.