What Happens If You Exceed Your Overdraft?

What Happens If You Exceed Your Overdraft?

Going over an agreed overdraft limit — or spending into overdraft when no facility exists — usually triggers refused payments, interest charges and a negative mark on a credit file. The exact consequences depend on the bank, the type of account and how far into unarranged territory the account goes, but the general pattern is consistent across UK high-street lenders.

Understanding the rules that now govern what banks can and cannot charge is a useful starting point for anyone trying to work out where they stand. The Financial Conduct Authority (FCA) significantly overhauled overdraft pricing rules, which came into full force on 6 April 2020, and those rules remain in place in 2026.

Arranged vs Unarranged Overdrafts: The Key Distinction

An arranged overdraft (sometimes called an agreed or authorised overdraft) is a borrowing limit agreed in advance with the bank. Spending within that limit incurs interest at the agreed rate, but no additional penalty fees are permitted under current FCA rules.

An unarranged overdraft occurs when an account holder spends beyond their agreed limit, or when a bank account has no overdraft facility at all and the balance goes negative. Before April 2020, banks commonly charged hefty daily fees or a separate, higher interest rate for unarranged usage. Those charging structures were banned by the FCA.

In practice this means that if someone goes over their limit, the bank applies the same annual interest rate to the entire overdrawn balance (including the amount over the limit), rather than switching to a punitive daily charge. The rate itself still varies considerably between lenders and can be as high as 39.9% EAR at some major banks, so the debt can still grow quickly if left unaddressed.

Immediate Consequences: What the Bank Is Likely to Do

Declined or returned transactions

When a payment would push an account past its agreed limit — or into negative territory where no overdraft exists — the bank may simply refuse the transaction. This can mean a Direct Debit for rent, a mortgage payment or a utility bill bouncing. Creditors may then charge their own late-payment fees, and some services can be disrupted or cancelled.

Some banks offer a small "buffer" zone (often around £10–£25) where the account will still process payments before formally going into unarranged overdraft. Whether this applies and how large it is differs by bank and account type.

Interest charged on the overdrawn balance

Interest begins accruing from the point the account goes over its limit. Because the FCA now requires a single annual interest rate, the charge is calculated as a percentage of the outstanding balance each day. On a balance of, say, £500 over the limit at 39.9% EAR, the daily interest cost would be roughly £0.55 — modest in isolation, but it compounds if the account is not brought back into credit.

Fees the bank cannot charge

Since 6 April 2020, banks cannot charge a separate fee simply for going over the limit or for each returned item in the unarranged overdraft context. Any lender still doing this would be in breach of FCA rules. The FCA's position is set out in its Consumer Credit sourcebook and the PS19/16 policy statement.

Credit File Impact of Exceeding an Overdraft

Going into unarranged overdraft is reported to the major UK credit reference agencies — Experian, Equifax and TransUnion — by most lenders. This is visible to future creditors such as mortgage lenders, credit card issuers and landlords who run credit checks. A single short episode of unarranged overdraft use is unlikely to cause lasting damage if the account is quickly brought back within its limit, but repeated or prolonged unarranged use can significantly affect a credit score.

If a bank ultimately closes an account because it has been persistently overdrawn, that closure is also recorded and can make it harder to open a standard current account elsewhere. In that situation, a basic bank account — which does not offer an overdraft — is one alternative available through most high-street banks, often without a credit check.

How long does unarranged overdraft use stay on a credit file?

Most account data, including overdraft usage patterns, remains on a credit file for six years from the date of the event. This is consistent with the general retention period used by UK credit reference agencies, though the precise rules are set by each agency's data-sharing agreements with lenders.

When Overdraft Debt Becomes Difficult to Manage

Some people find themselves persistently overdrawn — effectively living in their overdraft from one pay cycle to the next. This is a recognised pattern of financial difficulty. The overdraft never fully clears, interest accrues continuously, and the account never reaches a positive balance. In this situation the overdraft is functioning less like a short-term buffer and more like a revolving debt.

When an overdraft has become a long-term balance rather than a short-term facility, several formal debt management options exist in England and Wales. Each has specific eligibility criteria and consequences, and the right path for any individual depends on their full financial picture — which is why regulated debt advice is important before taking any formal step.

Debt Management Plan (DMP)

A DMP is an informal agreement, usually arranged through a debt adviser, in which a person makes reduced monthly payments to creditors. Overdraft debt can be included in a DMP alongside other unsecured debts. Interest and charges are often frozen during the plan, though this is not guaranteed. DMPs have no formal legal standing, so creditors are not legally bound to accept the arrangement.

Individual Voluntary Arrangement (IVA)

An IVA is a legally binding agreement between a debtor and their unsecured creditors, supervised by a licensed insolvency practitioner. It usually runs for five or six years. Overdraft balances owed to banks are classified as unsecured debt and can typically be included. Any debt remaining at the end of the agreed term is written off. IVAs are a formal insolvency procedure and are recorded on the Individual Insolvency Register.

Debt Relief Order (DRO)

For people with lower levels of debt and limited assets or income, a Debt Relief Order may be relevant. According to GOV.UK, the total qualifying debt limit for a DRO in England and Wales is currently £50,000 (raised from £30,000 on 28 June 2024). There is now no application fee — the previous £90 fee was abolished on 6 April 2024. A DRO lasts 12 months. Overdraft balances can be included as qualifying debt provided the account holder meets all the eligibility criteria.

Bankruptcy

Bankruptcy is a formal insolvency option for those who cannot repay their debts. It costs £680 to apply in England and Wales (according to GOV.UK). Overdraft debt is written off as part of the bankruptcy process. Bankruptcy has significant consequences including restrictions on obtaining credit and, in some cases, effects on employment, so regulated advice is important before this step is considered.

Complaining About Overdraft Charges

If someone believes a bank has applied charges that breach FCA rules — for example, charging a fixed daily fee for unarranged overdraft use after 6 April 2020 — a formal complaint to the bank is the first step. Banks are required to respond within eight weeks. If the complaint is not resolved satisfactorily, it can be escalated to the Financial Ombudsman Service (FOS), which is a free, independent service.

The FOS can instruct a lender to refund charges it finds were applied incorrectly, as well as any interest that accrued on those charges. Information on how to contact the Financial Ombudsman Service is available on its website at financial-ombudsman.org.uk.

Free Debt Advice

Anyone struggling with overdraft debt or broader financial difficulty can access free, impartial debt advice from the following organisations:

• MoneyHelper — moneyhelper.org.uk — government-backed guidance service
• StepChange Debt Charity — stepchange.org — free debt advice and debt management plans
• Citizens Advice — citizensadvice.org.uk — free advice on debt, benefits and consumer rights
• National Debtline — nationaldebtline.org — free telephone and online debt advice

These organisations provide regulated, impartial advice at no cost to the person seeking help.

Common Questions About Exceeding an Overdraft

Can a bank close an account for going over the overdraft limit?

Banks generally have the contractual right to close an account, though they are typically required to give notice (usually around 60 days for personal accounts under UK Finance guidance). Persistent unarranged overdraft use, or a seriously overdrawn balance that remains unpaid, can lead a bank to exercise this right. If an account is closed with a debt outstanding, the bank may pass the balance to a debt collection agency.

Does exceeding an overdraft affect a mortgage application?

Mortgage lenders review bank statements — typically covering the last three to six months — as part of affordability and conduct checks. Regular unarranged overdraft use, declined payments or a persistent negative balance are factors some lenders consider when assessing creditworthiness. The precise impact varies by lender and the wider credit profile of the applicant.

Can an unarranged overdraft debt become statute-barred?

In England and Wales, the Limitation Act 1980 sets a general limitation period of six years for unsecured debts. If a creditor (or a debt collector to whom the debt has been sold) has not taken court action within six years of the last payment or written acknowledgement of the debt, the debt may become statute-barred — meaning it cannot be enforced through the courts. However, statute-barred debt does not disappear and the creditor can still attempt to collect it; it simply cannot obtain a County Court Judgment. Regulated advice is important before relying on limitation as a defence, as individual circumstances vary.