An overdraft allows you to keep using your current account when you don’t have enough money, giving you increased flexibility and a safety net for when something unexpected arises. It is a short-term way to borrow. Like most forms of credit, an overdraft costs money so it’s a good idea not to rely on it, and top your account up as soon as you can.
An overdraft is often referred to as an 'arranged overdraft' or an 'unarranged overdraft':
- An arranged overdraft is arranged with your bank before you use it, hence the name. It means payments can leave your current account even if they’ll take your account balance below zero. It has a set limit, for example if your overdraft is £500 then your account balance can go to -£500.
- An unarranged overdraft is when you go beyond your arranged overdraft limit, or if you don’t have one, you continue to spend from your current account after your balance has gone below zero. This may result in some payments not being made. Unarranged overdrafts are generally more expensive than arranged, and they can have a negative effect on your credit rating if they’re used regularly.
