Having a strong credit history can make it easier to borrow money when needed. However, if your credit history contains negative marks, lenders may view you as a higher-risk borrower. This is often referred to as adverse credit.
Adverse credit means your credit history includes issues such as missed payments, defaults, or County Court Judgements (CCJs). If you have adverse credit, you may find it more difficult to get approved for loans, credit cards, or mortgages. In cases where credit is offered, lenders may charge higher interest rates to reflect the increased risk.
Understanding how adverse credit works and what you can do to improve your credit score can help you manage your finances more effectively. In this guide, we’ll explain everything you need to know.
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What is Adverse Credit?
Adverse credit is when Credit Reference Agencies (CRAs) class your credit rating as poor. The CRAs collect information about you and store it for other lenders to see when you apply for credit. The three key CRAs in the UK are:
The information that’s held with these agencies is kept on your credit file. From this data, your credit score is generated. If you have an adverse credit history, it’s because you’ve had negative information recorded on your credit file.
What is Adverse Credit History?
Your credit history reflects how you have managed borrowing and repayments in the past. If you have struggled financially, you may have missed loan repayments or borrowed up to your credit limit. These factors can lead to an adverse credit history, which may affect your ability to access credit in the future.
How do I know if I have adverse credit?
To find out if you have adverse credit, look at your credit report. You can check with the three main credit reference agencies: Experian, Equifax, and TransUnion. If your credit score is very low, you have adverse credit.
How can adverse credit affect me?
Adverse credit can impact various aspects of your financial life.
- It may be more difficult to get approved for mortgages, loans, or credit cards.
- Lenders that offer credit to those with adverse credit may charge higher interest rates.
- Some landlords check credit reports, which could make renting a property more challenging.
- You may also face difficulties when applying for services such as mobile phone contracts.
How does adverse credit affect my ability to get a mortgage?
If you’ve got an adverse credit history, it will affect your ability to get a mortgage. Mortgage providers want to be sure you can manage the repayments. That’s why they prefer it if you have a good credit rating when you apply.
But each mortgage company will have their own way of scoring you to decide if they’re going to lend to you. And there are some mortgage companies who might consider giving you an adverse credit mortgage. They’re specialist lenders that are likely to charge you a higher rate of interest.
What types of loans are available with adverse credit?
Having adverse credit doesn’t mean you can’t take out a loan, there are some options available to you.
1. Bad credit loans
Some lenders offer loans for people with bad credit. These loans do have higher interest rates than traditional personal loans from a bank or building society.
2. Guarantor loans
If you’ve got bad credit and can’t get a loan, a guarantor loan might be possible. This is where a family member or a friend guarantees that the loan you take out will be repaid. If you fall behind on your repayments, your guarantor will be responsible for paying the loan.
3. Debt consolidation loans
If you have lots of loans, you might want to pay them all off with one loan. A debt consolidation loan can help you manage your repayments by having only one repayment. This would only be a good idea if the interest rate is less than what you’re paying on your other loans.
What causes adverse credit?
Several factors can contribute to an adverse credit history. The following are some of the most common reasons for a poor credit score:
1. Arrears on your loans
If you miss loan repayments, you are considered to be ‘in arrears.’ Missed payments are recorded on your credit file and can negatively impact your credit score. The longer you remain in arrears, the more severe the impact.
If repayments continue to be missed, the account may default. Defaults indicate financial difficulties and remain on your credit file for six years from the date they occurred.
2. County or High Court Judgements for debt
If a debt remains unpaid and communication with the lender is ignored, legal action may be taken. The court may issue a County Court Judgement (CCJ), setting out how the debt must be repaid.
Once issued, a CCJ stays on your credit file for six years from the judgment date. This can significantly impact your ability to obtain credit.
3. Bankruptcy
When you are declared bankrupt, it’s recorded on your credit file. For the first 12 months, you’ll be bound by the terms of your bankruptcy. During this time, you won’t be able to take out a mortgage or loan.
After the initial 12 months have passed, your bankruptcy will usually be discharged. It’ll take longer if you don’t cooperate with the trustee (the person dealing with your bankruptcy). Once it’s discharged, it’ll still be seen on your credit file for 6 years, which will have a big impact on your credit rating.
4. Repossession
Falling behind on mortgage repayments can lead to repossession, where a lender takes ownership of your home and sells it to recover the outstanding debt.
A repossession is recorded on your credit file for six years and can impact your ability to:
- Take out further credit.
- Secure rental agreements, as some landlords check credit reports.
5. You’re not on the electoral roll at the address you claim to live at
If you are not registered to vote at your current address, it may affect your credit score. Lenders use this information to verify your identity and prevent fraud. Registering on the electoral roll is a simple step that may help improve your credit rating.
6. Multiple applications for credit
Applying for credit too frequently can lower your credit score. Each application may involve a hard credit check, which leaves a visible mark on your credit file.
Too many applications in a short period may signal to lenders that you are financially struggling. Credit applications typically remain on your file for up to 24 months.
7. There is an error on your credit report
Whilst it doesn’t happen too often, an error on your credit report can have an impact on your credit score. It could be due to fraudulent activity or even your address being incorrect. But if there’s a mistake on there, it could contribute to you having an adverse credit rating. That’s why checking your credit report regularly is worth doing.
If any of the above are marked on your credit file, you can’t get them removed until they’re officially deleted. As seen, for most of these, it can be up to 6 years. With an adverse credit rating, you’ll find it hard to borrow money. And if you can find a lender who’ll lend to you, the interest rate will be high.
How can I avoid adverse credit?
There are things you can do to avoid getting adverse credit. Here are some tips.
- Make all your repayments on time. This makes a big difference to your credit rating.
- Don’t borrow up to your credit. Try to keep your borrowing to about 30% of your total credit limit.
- Keep checking your credit score so that as soon as it changes, you can take action to improve it.
How can I fix my adverse credit?
If you have adverse credit, there are steps you can take to improve your credit score over time:
- Reduce your outstanding debts: Paying down existing debts can help improve your credit profile. Making regular payments on time is key.
- Build a credit history: If you have little or no credit history, consider using a credit builder credit card to demonstrate responsible borrowing.
- Register on the electoral roll: Being listed at your current address can help lenders verify your identity and may improve your credit score.
- Check your credit report for errors: Even small mistakes, such as an incorrect address, can affect credit applications. Regularly reviewing your report ensures all information is accurate.
Conclusion
Adverse credit refers to a history of financial difficulties that have negatively impacted a person’s credit file. This can be caused by missed payments, loan defaults, or even bankruptcy.
Having adverse credit can make it harder to access new credit, and if approved, you may face higher interest rates. It can also affect other areas of life, such as renting a property, as some landlords check credit reports.
Being mindful when borrowing money and only taking on what you can afford to repay can help prevent adverse credit. Understanding the factors that contribute to it allows you to take steps to manage and improve your financial health.
Disclaimer: The information given above is provided for reference only.