Overdraft Debt

What overdraft debt is

An overdraft is a form of credit attached to a current account. When your balance falls below zero, you're borrowing money from the bank to cover the shortfall. Interest is charged on the amount borrowed, and the bank can demand repayment under the terms of the account agreement. Overdraft debt is one of the most widely used forms of credit in the UK — the FCA estimates around 14 million adults use overdrafts in a typical month.

There are two types of overdraft: authorised (also called "arranged"), where the bank has pre-agreed a borrowing limit with you, and unauthorised (also called "unarranged"), where you've gone overdrawn without prior agreement. Both are regulated by the FCA under the Consumer Credit Sourcebook (CONC), and since April 2020 both must be charged at the same simple annual interest rate — a major reform that ended the era of punitive unauthorised overdraft fees.

The 2020 FCA overdraft reforms

Until April 2020, unauthorised overdraft charges in the UK were notoriously expensive — some equivalent to APRs of several thousand per cent. The FCA introduced sweeping reforms that took effect on 6 April 2020:

• Single, simple interest rate. Banks must charge the same simple annual interest rate for arranged and unarranged overdrafts. No more flat-rate fees, no more daily charges.
• Ban on fixed fees. Banks cannot charge separate fees for using an overdraft (such as £6/day fees that were common before).
• Clearer comparison. APRs must be displayed prominently in account documentation.
• Repeat use guidance. Banks must identify customers in "repeat use" of their overdraft (typically defined as overdrawn most of the month, every month) and contact them to discuss alternatives.
• Refused payment fees capped. The fee for refusing a payment due to insufficient funds must reasonably reflect the bank's actual cost.

The reforms have shifted the overdraft market: typical authorised overdraft APRs now sit around 35-40% — high, but no longer ruinous. The FCA continues to monitor repeat overdraft use as a marker of persistent financial difficulty.

What happens if you can't repay an overdraft

Overdrafts are repayable on demand under standard terms. The bank can in theory ask for the full balance back at any time. In practice, banks rarely do this immediately and follow a recovery process that broadly mirrors other unsecured debt recovery:

1. Notification of overdraft limit being exceeded. If you go beyond an authorised limit, the bank notifies you and may refuse further payments.
2. Engagement and forbearance. Under FCA rules (CONC 7), the bank must engage with you and offer reasonable forbearance if you're struggling. This might include freezing interest, reducing the limit, or converting to a structured loan.
3. Default notice. If the situation doesn't improve, the bank issues a default notice under the Consumer Credit Act, giving you 14 days to bring the account back within terms.
4. Account closure. The bank may close the current account and demand full repayment of the overdraft balance.
5. Default registered. A default appears on your credit file, staying for 6 years.
6. Sale to debt collection. The bank may pass the closed-account debt to a collection agency.
7. Court action. Unresolved debts can be referred to County Court for a CCJ.

The 6-year statute of limitations on overdraft debt

Overdraft debt in England, Wales and Northern Ireland becomes statute-barred after 6 years from the last payment or written acknowledgment, under the Limitation Act 1980. In Scotland it's 5 years under the Prescription and Limitation (Scotland) Act 1973.

Overdraft debt is slightly unusual in how the limitation clock starts. The 6 years typically run from the date the bank "called in" the overdraft (formally demanded repayment) — not necessarily from the date you stopped using the account. Banks usually do this through a formal letter or default notice. As with other debts, any payment or written acknowledgment resets the clock.

Your rights when dealing with overdraft debt

Overdraft customers have specific protections:

• The right to be treated fairly under FCA rules CONC 7 — banks must offer forbearance for customers in financial difficulty
• The right to be contacted about repeat use under the 2020 reforms — banks must engage if you're consistently overdrawn
• The right to a Section 77 copy of your overdraft agreement — though current account overdrafts may have simpler documentation requirements
• The right to claim Breathing Space under the Debt Respite Scheme
• The right to a basic bank account if your current account is closed because of overdraft debt — basic bank accounts must be offered by all major banks and don't include overdraft facilities
• The right to complain to the Financial Ombudsman Service for free if you're unhappy with how the bank has handled your situation

What solutions apply to overdraft debt

Overdraft debts are unsecured and can be included in every major UK debt solution:

• Individual Voluntary Arrangement (IVA): Overdraft debt can be included in an IVA. However, the bank will usually close the current account before or during the IVA, meaning you'll need to open a basic bank account elsewhere.
• Debt Relief Order (DRO): Overdraft debt can be written off through a DRO if you meet the eligibility criteria. As with an IVA, you'll need a basic bank account.
• Debt Management Plan (DMP): A DMP can include overdraft debt. Most banks will close the account once a DMP is set up and treat the overdraft balance as a fixed debt.
• Bankruptcy: Overdraft debts existing before the bankruptcy order are included and written off when the bankruptcy ends.

Before exploring formal solutions, check whether converting the overdraft to a structured personal loan (often offered by banks under the 2020 repeat-use rules) would resolve the immediate problem at a lower cost.

If you're stuck in your overdraft right now

The most important step is engagement with the bank. Under the 2020 FCA reforms, banks must actively engage with customers in repeat overdraft use and offer alternatives.

Practical first steps:

1. Contact the bank. Tell them you're struggling to clear the overdraft. Under FCA rules, they must consider affordable options.
2. Ask about converting to a structured loan. A personal loan to clear the overdraft can dramatically reduce interest costs and gives you a clear repayment schedule.
3. Open a basic bank account at a different bank. If you're stuck in a cycle, a fresh account elsewhere (one without an overdraft) can stop new debt building while you resolve the old one.
4. Seek free regulated debt advice. StepChange, MoneyHelper, Citizens Advice and National Debtline all advise on overdraft debt, often alongside other debts.
5. Consider Breathing Space. The 60-day Debt Respite Scheme pauses interest and enforcement while you get advice.

How UK Debt Team can help

We're an introducer, not a debt advice service. That distinction matters: deciding which approach is right for overdraft debt — a structured loan conversion, a basic bank account switch, a formal debt solution, or something else — is the role of a regulated debt adviser, not us.

What we do is connect people seeking help with regulated solution providers who can carry out that assessment. There's no cost or obligation to use the “Speak to a debt specialist” button below. If you'd rather go straight to free regulated debt advice, the organisations listed below are an excellent place to start.