Consumer credit research: overdrafts

Find out about our research into overdrafts, our key findings and what we will do next.

Overdrafts allow an account holder to take money from their account when there is no money in it. This can be up to an agreed limit (for an authorised overdraft) or beyond the agreed limit at the bank’s discretion (for an unauthorised overdraft).

A few authorised overdrafts are free up to a limit. Otherwise consumers pay for overdrafts through interest, maintenance or usage fees, paid and unpaid item charges, and unauthorised overdraft fees if payments exceed the balance.

Authorised overdrafts can provide a convenient way to help consumers manage day-to-day finances. Unauthorised overdrafts are intended primarily for ‘emergency’ use and are much more expensive.

Key findings

We found that consumers:

  • pay little attention to overdrafts when choosing a bank account
  • often do not see overdrafts as debt and quickly become accustomed to using them
  • do not know how much overdrafts cost and are confused by unauthorised overdrafts
  • do not actively repay overdrafts, repayments are driven by funds coming in

Our research also shows that overdraft providers:

  • can earn revenue from consumers’ lack of understanding, confusion and limited attention
  • have incentives to raise revenue by increasing overdraft limits
  • have historically had very high, complex and opaque charges for unauthorised overdrafts and this appears to still be the case

Overall, we think the voluntary measures agreed between Government, The Office of Fair Trading (OFT) and industry have helped reduce overdraft costs, but we think a significant number of overdraft users are still potentially paying too much.

Find out more about key findings from our research. You can also see what we found about how firms and consumers manage overdrafts.

What we plan to do and why

To further reduce costs, building on the progress already made through voluntary measures agreed with the industry, we will investigate how providers set and monitor overdraft limits and their governance and strategies for doing so by autumn 2014.

We will also start to consider making some voluntary measures mandatory in autumn 2014.

To avoid unwanted wider impacts on the current account market, we will work alongside the Competition and Markets Authority to make sure our actions complement (and do not duplicate) its work updating the OFT’s 2013 review of the PCA market.

Recent regulatory steps on overdrafts

The Office of Fair Trading’s (OFT) July 2008 study of personal current accounts found unauthorised overdraft charges were complex and not transparent, and consumers lacked control and experienced problems switching accounts.

Since then, voluntary measures on overdrafts have been agreed between industry, OFT and Government. These include providing consumers with annual summaries of charges and illustrative scenarios of cost, giving consumers the ability to opt-out from unarranged overdrafts for free, making charges more transparent, introducing texts alerting the account holder that an overdraft may be used, and introducing grace periods and buffer zones before charges are incurred.

In its January 2013 review of the current account market the OFT found improvements had been made but these were due to regulatory and Government actions rather than improvements in competition.

We have now taken over the regulation of consumer credit from the OFT but you can see the OFT’s reports from July 2008 and January 2013.

Further information

We carried out intensive consumer research to help us understand:

  • what consumers want and expect from the credit market
  • the role that credit plays for consumers in different circumstances and at different points in their lives
  • how credit can either help consumers or lead them into difficulty

You can see in-depth assessments into other areas of the credit market where we have seen potential risks to consumers. These are:

You can also see more detail in our full consumer research report.