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Overdrafts explained

If you need to make ends meet or cover unexpected costs, an overdraft can be a useful way of borrowing money in the short term. 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 is a way to 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.

Some current accounts come with an arranged overdraft facility. Others don’t, in which case you need to request one from your bank. Not all bank accounts are eligible for an arranged overdraft, however.

Advantages and disadvantages of overdrafts

It’s important to weigh up whether an overdraft is the best option for you. The below table highlights some of the advantages and disadvantages of using one.
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
It’s important to weigh up whether an overdraft is the best option for you. The below table highlights some of the advantages and disadvantages of using one.
Advantages

You can borrow what you need to

(up to your overdraft limit)

Disadvantages You’ll likely be charged interest for borrowing
Advantages There may be flexibility when paying it back
Disadvantages 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
Disadvantages The interest rate for using an overdraft may be higher than other ways of borrowing

Arranged overdraft vs unarranged 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.

An unarranged overdraft is where you haven’t agreed an overdraft with your bank, but spend more than is in your current account. Spending more than your arranged overdraft limit will also take you into an unarranged overdraft.

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 to make 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.

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 not able to pay it all off at once, transferring what you can 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 can 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

Explore more: How to get out of your overdraft

Do overdrafts affect your credit score?

Banks send information to Credit Reference Agencies (CRAs) about your accounts. This will include when an account was opened, if you have an arranged overdraft limit and how much that is, and how you use your overdraft. 

If you manage your account and overdraft well, this can help build your credit score. If you go into an unarranged overdraft on your account, it will be reported to the CRAs and could negatively affect your credit score and your ability to get credit in the future.

What happens if you don’t pay back your overdraft?

HSBC has the option to withdraw your overdraft and require 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, speak to us as we may be able to help. 

If you’re an HSBC customer, you can call our team of specialists on 0345 850 0622 to get a helping hand.1

Lines are open:

  • 8am to 9pm, Monday to Thursday
  • 8am to 6pm, Friday
  • 8.30am to 4pm, Saturday

Please note, lines will not be open on Christmas Day, Boxing Day and New Year's Day.

What 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.  

See the Making sense of overdrafts leaflet to find out more about how HSBC overdrafts work.

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