Understanding UK Bank Overdraft Rules After FCA Reform

The FCA's Overdraft Revolution

In April 2020, the FCA fundamentally reformed how UK banks charge for overdrafts — ending what the regulator called a "dysfunctional" market where unarranged overdraft fees sometimes exceeded payday loan rates.

What Changed

Banks can now only charge a single interest rate on overdrafts expressed as an APR. No daily or monthly fixed fees, no refused payment fees, no non-usage fees. All overdrafts — arranged and unarranged — are charged at one transparent rate.

Most major banks now charge 19.9–39.9% APR. While high compared to mortgages, it's far more transparent than the old opaque fee structure.

Current Rates from Major UK Banks

• Monzo: 19%, 29%, or 39% APR (based on your assessment)
• Starling: 15%, 25%, or 35% EAR
• First Direct: 39.9% APR with £250 interest-free buffer
• NatWest: 39.49% APR

Calculating Your Cost

At 39.9% APR: a £500 overdraft for 30 days costs approximately £16.40. For 7 days, approximately £3.83. Compare this against alternatives like a 0% purchase credit card for planned expenses.

Avoiding Charges

• Set a low balance alert in your banking app
• Use a Monzo or Starling Pot as an emergency buffer
• Ask your bank to reduce your limit if you consistently use it
• Consider a 0% money transfer credit card for recurring shortfalls