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Overdrafts explained

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.

Is an overdraft the best option for you?
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 increase your overdraft limit (if you can afford it) or reduce the limit as needed. The interest rate for using an overdraft may be higher than other ways of borrowing
Is an overdraft the best option for you?
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 increase your overdraft limit (if you can afford it) or reduce the limit as needed. You may be able to increase your overdraft limit (if you can afford it) or reduce the 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. Depending on the type of current account you have, you may have the option to take out an arranged overdraft.

What is an unarranged overdraft?

An unarranged overdraft can happen when:

  • There isn't an arranged overdraft with us but you spend more than the amount in your current account (which means the balance goes below £0)
  • You spend more than your arranged overdraft limit

What is overdraft interest?

Overdraft interest is a charge for when you use either an arranged or unarranged overdraft. Banks charge overdraft interest on how much of your overdraft you use. Overdraft interest is usually quite expensive so think carefully before using your overdraft. 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.

Tips for paying off your overdraft

If you need to reduce your spending to reduce your overdraft, here are a few things you may want to do:

  • Build a budget to see where your money is going
  • Split your spending into ‘needs’ and ‘wants’, then focus on cutting down your ‘wants’
  • Track your spending closely to make sure you’re sticking to your budget

Do overdrafts affect your credit score?

Credit Reference Agencies (CRAs) collect and hold secure information about your credit history, including: 

  • When an account was opened
  • If you have an arranged overdraft limit and how much that is
  • 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, visit our money worries page. 

Explore: What to do if you fall behind on debt repayments 

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.