Should I pay off my overdraft?
Usually, yes, and soon. An arranged overdraft is one of the most expensive ways to borrow in the UK. Here's what yours costs and how to clear it without bouncing back.
What an overdraft really costs
Since April 2020, UK banks must charge a single interest rate on overdrafts (no daily or monthly fees), shown as an EAR. Many big banks charge around 35–40% EAR, which is more than most credit cards. Sitting £1,000 overdrawn all year at 39.9% EAR costs about £400 in interest.
Should I use my savings?
If your savings earn 4% and your overdraft costs 40%, every £100 moved saves you about £36 a year. Usually it's worth using savings, but keep a small emergency buffer (even £300–£500), so one surprise bill doesn't send you straight back into it.
Three ways to clear it
- Chip away on payday: set up a standing order into savings the day after payday, and gradually lower the overdraft limit too, so the money can't flow back.
- Move it to 0%: some credit cards offer 0% money transfers into your current account, usually for a one-off fee of around 3–4%. You'll need a plan to clear it before the 0% ends.
- Put it in a debt plan: list it with your other debts and use the snowball vs avalanche calculator. At around 40%, avalanche usually puts the overdraft first.
If you're struggling
Banks must help customers who are in financial difficulty, so talk to yours early. Free, confidential help is available from StepChange, National Debtline and MoneyHelper.
Sources: FCA overdraft rules (2020). Rates vary by bank and customer, so use the EAR on your statement. This is general information, not financial advice.
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Is it bad to be in your overdraft all the time?
It's expensive rather than 'bad'. At around 40% EAR, a permanent £1,000 overdraft costs about £400 a year. Clearing it is one of the best-value things you can do with spare money.
Does an overdraft affect my credit score?
An arranged overdraft used within its limit is usually fine, but being constantly near or over the limit can count against you with lenders.
Should I pay off my overdraft or credit card first?
Compare the rates. Many overdrafts (around 35–40% EAR) cost more than a typical credit card, so the overdraft often comes first. Always keep up the minimum payments on everything.
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