Help with a bank overdraft on a low income

An overdraft often starts as a cushion for the last few days before payday and slowly becomes permanent. When your income is low, the account may sit in the red all month, interest builds up and each benefit payment or wage is swallowed as soon as it lands. Meanwhile bills bounce, and you may feel too embarrassed to call the bank.

You have more options than you think. UK rules set out how banks must price overdrafts and treat customers in difficulty, and free advice services deal with overdrafts every day. This page explains what to do, in what order, and why taking a new loan to clear the overdraft is rarely the first answer.

How overdrafts are charged in the UK

Since April 2020, Financial Conduct Authority rules mean banks and building societies charge overdrafts with a simple annual interest rate, rather than fixed daily or monthly fees, and must show an APR so that you can compare. Unarranged overdrafts cannot be priced higher than arranged ones. Many overdraft rates are high, comparable to some credit cards or more, so a balance that never clears can cost a significant amount over a year.

Look at your last few statements and work out how much interest you pay each month. That figure is your benchmark when you compare any alternative.

Step one: protect your essential spending

If your wages or benefits are paid into the overdrawn account, the bank can use them to reduce the balance. Before anything else:

• Open a basic bank account with a different bank. Basic accounts are fee-free, have no overdraft and are available to people with a poor credit history.
• Change where your wages and benefits are paid, so that money for rent, food and energy is not absorbed.
• Move direct debits for priority bills, such as rent, council tax and energy, to the new account.

This is not about avoiding the debt. It gives you room to pay priority bills and make a realistic offer to the bank.

Step two: tell the bank and ask for specific help

Banks must treat customers in financial difficulty fairly and consider forbearance. Call or write and ask, specifically, for:

• a freeze or reduction of interest and charges;
• a repayment plan to reduce the overdraft gradually at an amount you can afford;
• conversion of the overdraft into a fixed-term repayment arrangement, often at a lower rate;
• a pause while you get debt advice.

Have a short budget ready showing income and essential costs. If you are vulnerable because of illness, disability or a recent bereavement, say so; banks should take it into account.

Step three: get free debt advice

Free, confidential services such as StepChange, National Debtline, Citizens Advice and MoneyHelper can write to the bank on your behalf, help you deal with all your debts together and check that priority debts come first. In England and Wales, an adviser can apply for Breathing Space, which pauses most interest, charges and enforcement for 60 days while you find a solution. Scotland has its own moratorium within its debt solutions.

If the overdraft is only one of several debts, see our page on debt hardship assistance, and for payments already overdue read help with urgent debt repayments.

Raise your income before borrowing

Cutting costs alone rarely clears a long-standing overdraft when the budget is already tight, so look at the income side as well.

A permanent overdraft is often a sign that income does not cover the basics. Run a benefits check with an adviser or an online calculator: Universal Credit, Council Tax Reduction, Pension Credit and social tariffs for water, broadband and energy are commonly under-claimed. Grants from charities or your energy supplier can cover a specific bill and free money to reduce the overdraft.

Should you borrow to clear the overdraft?

Sometimes replacing an overdraft with a cheaper fixed loan makes sense, but only if the new APR is clearly lower, the monthly repayment fits your budget and you close or reduce the overdraft limit so it does not fill up again. Options to compare:

• a credit union loan, with interest capped by law and often available to people refused by banks;
• a small loan designed for low incomes from a responsible community lender;
• help from family, written down with a clear repayment plan.

Avoid payday loans, short-term lenders and guarantor loans to clear an overdraft: the cost is usually higher and the cycle starts again. Never pay an upfront fee to a "debt clearance" company or a lender that contacts you through social media; genuine lenders do not ask for money before paying out.

What an overdraft means for your credit file

Some banks offer to reduce your overdraft limit gradually each month. This can work, but only if the steps are small enough; ask for a pace that leaves money for priority bills, and get the agreement in writing. If the bank refuses reasonable help or treats you unfairly, you can complain to the bank and then, if you are not satisfied, to the Financial Ombudsman Service, which is free.

Overdraft use is reported to credit reference agencies. Staying within an arranged limit is less damaging than going beyond it, and a repayment arrangement may be recorded. Recovery takes time, but steady payments and closing unused credit help. You can check your file free with the main agencies.

Overdraft action checklist

• Calculate the monthly interest you are paying.
• Open a basic bank account elsewhere and move your income.
• Write to the bank asking for interest freeze and a repayment plan.
• Contact a free debt adviser; ask about Breathing Space.
• Check benefits and social tariffs you might be missing.
• Only borrow to clear the overdraft if the deal is clearly cheaper.