What is an overdraft? | Overdraft Definition | NatWest (2024)

Overdraft, credit card, or loan? If you're unsure which type of borrowing to use, it can be tricky deciding which type of lending is right for you. So, we've summarised the options and their advantages and disadvantages in our handy guide below for you to easily compare and contrast.

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Credit scores are based on lots of factors, such as the amount of credit you have, the average age of accounts, and the number of inquiries on your credit report.

An arranged overdraft is unlikely to have a major impact on your credit score as long as you don’t go beyond your overdraft limit or have payments refused. In fact, if you use your overdraft sensibly and regularly pay it off, it could improve your credit rating. However, your overdraft could negatively affect your credit score if you regularly go beyond your overdraft limit or into an unarranged overdraft. For more information about credit scores, why not take a look at our Credit scoring guide.

When you apply for any type of credit, including overdrafts, it will impact your credit score as a credit check is performed as part of the application. That’s why it’s a good idea to check your chances of being acceptedbefore you apply.

It’s important to remember that an overdraft has associated charges, but you’ll only pay interest if you use it.

If you’re looking to understand more about how much interest you’d pay based on your own circ*mstances and borrowing amount, head on over to our Overdraft cost calculator.

EAR stands for Effective Annual Rate.

This is equivalent to the rate of interest you’ll pay if you’re overdrawn for a year. You’ll pay interest on the amount you’re overdrawn by, and on the interest that builds up from being overdrawn. So you’ll pay less if you regularly pay off your overdraft. EAR doesn’t include other fees that may be charged.

APR stands for Annual Percentage Rate.

It is calculated in the same way as the EAR. APR is a way that lenders show the interest and additional charges you will pay on what you’re borrowing. APR can also be referred to as the ‘full cost of borrowing’. But we don’t charge any other fees for using an overdraft, so our EAR and APR are the same.

You can use our Overdraft cost calculatorto work out how much interest you’d pay based on your own circ*mstances and borrowing amount.

At NatWest, we don’t charge fees for using your overdraft, just interest. If you’re looking to understand more about how much interest you’d pay based on your own circ*mstances and borrowing amount, head on over to our Overdraft cost calculator.

It’s important to know that there are other charges associated with overdrafts such as an Unpaid Transaction Fees. An Unpaid Transaction Fee is charged for a transaction that is returned unpaid by your bank or lender. A transaction (e.g. a Direct Debit) will be returned if the payment cannot be met from funds in your account or any unused arranged overdraft facility and your bank decides (at their discretion) not to make the payment.