Overdrafts
Your bank has agreed to lend you money when your account runs dry. Follow £1,000 of it for a night, a month and a year, see how it stacks up against a credit card, then put in your own numbers.
1 · Money your bank agreed to lend you
Say you've got £100 in your current account.
An arranged overdraft is an amount your bank has agreed to lend you when that runs out. It sits below zero.
"Arranged" means agreed in advance: here, up to £500. It's a loan from your bank, not your money.
Then a £500 bill arrives. You've only got £100, but with a £500 arranged overdraft the bill still goes through.
Your £100 is gone and your balance now reads −£400.
That −£400 isn't your money. It's a debt, and it's charged interest.
2 · A night
Say you're £1,000 overdrawn at about 40% a year and leave it for a month. Roughly what does it cost?
Most big UK banks charge about 40% a year (39.9% EAR at HSBC, Lloyds and Nationwide). It's worked out for every day you end overdrawn: about 0.0933% a day.
On £1,000, one night costs about 93p.
Most banks look at your end-of-day balance. Get the money back in before the day ends (HSBC: before 23:45) and that day usually costs nothing.
your turn
3 · A month
A coin for every night. Thirty nights on £1,000 comes to about £28.
There's usually no fixed monthly repayment. Nothing makes you pay it back on a schedule, so it's easy to stay in it.
Money coming in pays the overdraft off first. Pay in £400 and you owe £600; from then on you're charged on the £600: about 56p a night.
4 · A year, and the EAR
Leave it, and each month's interest is added to what you owe. From then on, it's charged interest too.
Leave £1,000 there for a whole year and the interest comes to about £400.
Not 93p × 365 (£340.50): the other £58.50 is interest on interest. That's why banks quote an EAR, the effective annual rate: it counts it. 39.9% EAR really does mean about £399 on £1,000 over a year.
your turn
5 · Against a credit card
A typical credit card charges about 25% (24.71% on average, Bank of England). The same £1,000 owed on a card for a year costs about £250 instead of £400.
And on a card, if you clear the full statement balance by the due date, purchases usually cost no interest at all. An overdraft has no interest-free period.
It's still nowhere near payday-loan prices: those are capped at 0.8% a day, about 8.6 times an overdraft's daily rate. But it's one of the more expensive ways to borrow for weeks or months.
6 · If you're always in it
A 0% money transfer credit card pays money into your bank account. Your overdraft clears, but the debt hasn't gone: you owe the card now.
There's usually a transfer fee, often about 4% (£40 on £1,000), and the 0% ends. Pay at least the minimum each month, and aim to clear it before the deal runs out.
A one-off £40 is more than a month in the overdraft (£28). On £1,000, the fee only works out cheaper once you'd have been overdrawn for about six weeks (43 days).
Fine for a night, costly for months. £1,000 overdrawn costs about 93p a night, £28 a month and £400 a year.
Back the same day? Usually nothing.
The numbers above use the big banks' 39.9%. Yours may differ, and a few details change the cost a lot.
Look up your account's overdraft EAR: most big banks charge about 40%, but some app banks and Barclays price by your credit score. Some accounts give an interest-free amount first (HSBC £25, Nationwide £50), which trims the cost on small balances.
Interest is charged on your end-of-day balance, so a gap that closes the same day usually costs nothing. Check your bank's cut-off time (HSBC: 23:45), and remember a payment that arrives tomorrow means one night's interest.
Compare the fee with what staying overdrawn would cost for as long as you expect to be in it, and check how long the 0% lasts against how fast you can pay it off. After the 0% ends, the card's normal rate applies.
Put in how much you're overdrawn and for how long. See what it costs, and what the same money would cost on a credit card or moved to a 0% money transfer card.
your overdraft would cost about
£28over 30 days
Assumptions: the balance stays the same (no money in), the rate doesn't change, interest is worked out daily at the rate's nominal yearly equivalent ÷ 365 and added monthly. Moving an overdraft onto any credit card is a money transfer: both card options pay the transfer fee (added to the card balance). The ordinary card then charges its APR on all of it from day one, worked out the same way (minimum payments would make it a little lower); the 0% card charges nothing while the 0% lasts; if you'd still owe it when the 0% ends, its normal rate (the credit card rate you entered) applies to the whole balance, fee included, for the rest of the time. Education, not financial advice.
The video
The same story, drawn: the account sign that slides below zero, a 92p coin for every night of the month, the year's bars against a credit card, the clock at midnight and the 0% card that moves the debt. (The video rounds a night to 92p; worked the way banks do it, it's 93p.)
How the numbers on this page are made. One model drives every drawing, readout and sentence. Banks work interest out daily and add it monthly, so the daily rate is the nominal yearly rate ÷ 365: 39.9% EAR → 12 × (1.3991/12 − 1) = 34.05% a year → 0.0933% a day. One night on £1,000: 93p (under £1). Seven days: £6.53. Thirty days: £27.99. A year, interest added monthly: £399.00, against £340.50 for 93p × 365 with no interest on interest (£58.50 more). HSBC's own example reproduces exactly: (£1,200 − £25) × 0.0933% × 30 = £32.88. Credit card at 24.71% APR, a year: £247.10. Moving the overdraft onto that card is a money transfer: £39.90 fee + 24.71% on £1,039.90 (£58.95 for 30 days), never cheaper than the 0% card, which pays the same fee and no interest. A 3.99% transfer fee on £1,000: £39.90, cheaper than staying overdrawn from day 43. If the 0% ends before you've cleared it, the card's rate applies to £1,039.90 from then on: owing for 6 months on a 0% with 2 months left costs £39.90 + £79.43. Paying in £400 leaves £600: 56p a night. The video narrates 92p (daily compounding, 1.3991/365 − 1); banks add interest monthly, which gives 93p. Payday cap 0.8% ÷ 0.0933% ≈ 8.6.