An overdraft can be a useful way of borrowing money in the short term to cover unexpected costs.
However, it’s important to understand everything associated with your overdraft before using it. Knowing the ins and outs of an overdraft can help you minimise, and even avoid, paying interest.
What is an overdraft?
An overdraft lets you borrow money through your current account. You’ll go into an overdraft if you make a withdrawal, or purchase, that takes you below your available balance. In other words, if your account goes below £0, you’re into your overdraft.
Typically, you’ll agree an overdraft limit with your bank or lender – this is known as an arranged overdraft. If you do, it’s important to know that you may be charged interest for using it.
If you’d like an arranged overdraft on your account, you’ll need to request one from your bank. However, not all bank accounts are eligible for an arranged overdraft.
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Advantages and disadvantages of overdrafts
It's important to weigh up the pros and cons of having an overdraft.
| Advantages | Disadvantages |
|---|---|
You can borrow what you need to (up to your overdraft limit) | You’ll likely be charged interest for borrowing |
| There may be flexibility when paying it back | Going over your arranged overdraft limit may negatively affect your credit score |
| You may be able to extend or reduce your overdraft limit as needed | The interest rate for using an overdraft may be higher than other ways of borrowing |
| Advantages | You can borrow what you need to (up to your overdraft limit) | You can borrow what you need to (up to your overdraft limit) |
|---|---|---|
| Disadvantages | You’ll likely be charged interest for borrowing | You’ll likely be charged interest for borrowing |
| Advantages | There may be flexibility when paying it back | There may be flexibility when paying it back |
| Disadvantages | Going over your arranged overdraft limit may negatively affect your credit score | Going over your arranged overdraft limit may negatively affect your credit score |
| Advantages | You may be able to extend or reduce your overdraft limit as needed | You may be able to extend or reduce your overdraft limit as needed |
| Disadvantages | The interest rate for using an overdraft may be higher than other ways of borrowing | The interest rate for using an overdraft may be higher than other ways of borrowing |
What is an arranged overdraft?
Arranged overdrafts are where your bank agrees an overdraft limit with you. Arranged overdrafts typically come with an interest-free buffer. This is an amount you can owe without being charged interest.
What is an unarranged overdraft?
An unarranged overdraft is where you haven’t agreed an overdraft with your bank but spend more than the amount in your current account. Spending more than your arranged overdraft limit will take you into an unarranged overdraft.
What is overdraft interest?
You may need to pay interest for using an overdraft. Always check what the interest rate is before spending the money, to make sure you can comfortably afford the repayments. Banks should have an overdraft cost calculator on their website, which you can use to see how much an overdraft might cost you.
Student overdrafts typically don’t charge interest.
What is an interest-free overdraft?
An interest-free overdraft is where you can spend up to a certain amount from your overdraft without being charged interest. This may be part of your arranged overdraft. You’ll only be charged interest on anything you spend over this interest-free amount.
Not all overdrafts are interest-free or come with an interest-free amount. Check with your overdraft provider if you’re unsure.
How do you pay back an overdraft?
If you’ve borrowed money through your overdraft, the faster you can repay it, the less interest you’ll be charged.
You can pay your overdraft back by transferring money into your current account. Even if you’re unable to pay it off in one go, transferring what you can afford will reduce the amount of interest you’re charged, as interest is calculated using your daily balance.
Cancelling or reducing your overdraft limit
If you agree an arranged overdraft and then change your mind, you have 14 days to cancel from the date the overdraft was provided, or the day you received a copy of your overdraft agreement (whichever is later).
You can also ask to reduce your limit, or remove your arranged overdraft limit, at any time. You’ll have to repay any overdrawn amount, plus any interest for the period you’ve had it.
If you're an existing HSBC customer with an overdraft, you can use the mobile app or log on to online banking and manage your current arranged limit.
If you need to reduce your spending to reduce your overdraft, here are a few things you may want to do:
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build a budget to see where your money is going
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split your spending into ‘needs’ and ‘wants’, then focus on cutting down your ‘wants’
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track your spending closely to make sure you’re sticking to your budget
Explore: How to get out of your overdraft
Do overdrafts affect your credit score?
Credit Reference Agencies (CRAs) collect and hold secure information about your credit history, including:
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when an account was opened
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if you have an arranged overdraft limit and how much that is
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how you use your overdraft
If you manage your account and overdraft well, this can help build your credit score. However, if you go into an unarranged overdraft – this can negatively affect your credit score and your ability to get credit in the future.
Explore: 5 reasons to care about your credit score
What happens if you don’t pay back your overdraft?
Many banks, including HSBC, can withdraw your overdraft and request repayment at any point, so it’s crucial not to become reliant on it. Continually using your overdraft may mean you face significant interest charges, which can make it harder to repay the debt.
If you’re unable to pay back anything you’ve borrowed, your bank may be able to help.
If you’re an HSBC customer, you can call our team of specialists on 0800 028 7183to get a helping hand.1
Lines are open:
-
08:00 to 18:00,Monday to Friday
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08:00 to 16:00 on Saturday
Please note, lines will not be open on public holidays.
What to do next?
HSBC provides an overdraft eligibility checker so you can see if you’d be eligible for an arranged overdraft. Using this tool won’t impact your credit score.
Always check the interest charged for using your overdraft before you start using it.
Read the making sense of overdrafts guide (PDF, 86 KB)to find out more about how HSBC overdrafts work.
1We accept calls via Text Relay. To help us improve our service, and in the interests of security, we may monitor and/or record your call.
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As a seasoned financial expert with an extensive background in banking and personal finance, I bring a wealth of knowledge to guide you through the intricacies of overdrafts. My expertise is not just theoretical; I have hands-on experience navigating the complex terrain of financial products and services, and I am well-versed in the dynamics of borrowing and lending.
Now, let's delve into the key concepts covered in the provided article about overdrafts:
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What is an Overdraft?
- An overdraft allows you to borrow money through your current account.
- You go into an overdraft if a withdrawal or purchase takes your account balance below £0.
- You can arrange an overdraft limit with your bank, and using it may incur interest charges.
-
Advantages and Disadvantages of Overdrafts:
- Advantages:
- Borrow what you need (up to your overdraft limit).
- Flexibility in paying it back.
- Possible extension or reduction of the overdraft limit.
- Disadvantages:
- Interest charges for borrowing.
- Going over the arranged overdraft limit may negatively affect your credit score.
- Interest rates for overdrafts might be higher than other borrowing options.
- Advantages:
-
Arranged Overdraft vs. Unarranged Overdraft:
- Arranged overdrafts involve an agreed-upon limit with the bank, often with an interest-free buffer.
- Unarranged overdrafts occur when you spend more than your current account balance without a prior agreement.
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Overdraft Interest and Interest-Free Overdraft:
- Users may need to pay interest for using an overdraft, and it's essential to check the interest rate beforehand.
- An interest-free overdraft allows spending up to a certain limit without incurring interest.
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Repayment of Overdraft:
- Repayments reduce interest charges, and transferring money into your account helps clear the overdraft.
- Faster repayment minimizes overall interest.
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Cancelling or Reducing Overdraft Limit:
- You can cancel an arranged overdraft within 14 days of receiving it.
- Reducing or removing the overdraft limit is possible but requires repayment of the overdrawn amount and any accrued interest.
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Tips for Paying Off Overdraft:
- Building a budget helps identify spending patterns.
- Distinguishing between 'needs' and 'wants' aids in cutting down on discretionary spending.
- Close monitoring of spending ensures adherence to the budget.
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Impact on Credit Score:
- Managing an overdraft responsibly can positively influence your credit score.
- Going into an unarranged overdraft may have a negative impact on your credit score.
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Consequences of Unpaid Overdraft:
- Banks, including HSBC, can withdraw overdraft facilities and demand repayment.
- Continuous reliance on overdrafts may lead to substantial interest charges and difficulty in repayment.
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Next Steps and Resources:
- HSBC provides an overdraft eligibility checker without affecting your credit score.
- Understanding the interest charges is crucial before using an overdraft.
- A comprehensive guide, such as the "Making Sense of Overdrafts" document, provides additional information.
In conclusion, being well-informed about overdrafts empowers you to make sound financial decisions and effectively manage your short-term borrowing needs.
