âAdverse creditâ is a term used to describe someoneâs credit history when it is âbadâ or âvery poorâ. With adverse credit it can be much harder to take out a loan, credit card, or mortgage. Lenders offering loans to those of us with adverse credit will likely charge higher interest rates.
But what causes adverse credit?
Table of Contents
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 thatâs held within these agencies is kept on your credit file. It is from this data that your credit score is generated. If you have adverse credit, itâs because youâve had negative information recorded on your credit file.
What is Adverse Credit History?
Your credit history tells the story of well youâve managed your money in the past. If you fell on hard times, you might have been unable to repay your loans. Maybe you had to borrow up to your limit on your credit cards. If this has happened, youâd have an adverse credit history.
How do I know if I have adverse credit?
To find out if youâve got adverse credit, look at your credit report. Youâll find this with the 3 main credit reference agencies: Experian, Equifax and TransUnion. If your credit score is very low youâve got adverse credit.
How can adverse credit affect me?
Adverse credit can affect you in more ways than one.
- Itâll make it harder to secure mortgages, loans, or credit cards.
- Specialist adverse credit lenders are harder to find, and youâll pay higher interest rates.
- You might find it harder to rent a property as some landlords check your credit file.
- You can find problems when trying to take out things like a new mobile phone contract.
How does adverse credit affect my ability to get a mortgage?
If youâve got adverse credit, it will affect your ability to get a mortgage. Thatâs because a mortgage is a big commitment. Mortgage providers want to be sure you can manage the repayments. Thatâs 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 theyâre going to lend to you. And there are some mortgage companies who might consider giving you a mortgage with adverse credit. Theyâre 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 doesnât mean you canât take out a loan, there are some options available to you.
1. Bad credit loans
There are some lenders who offer loans for people with bad credit or with adverse credit. These do have higher interest rates than traditional personal loans from a bank or building society.
2. Guarantor loans
If youâve got adverse credit and canât 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 youâre paying on your other loans.
What causes adverse credit?
The following information on your credit file are some of the main things that cause adverse credit.
1. Arrears on your loans
If you miss any of your loan repayments, itâs known as being âin arrearsâ. Any missed payments are recorded on your credit file. These hurt your credit score and the longer you stay in arears, the worse things can get.
If you continue to miss repayments, youâll fall into default. Having a default on your credit report shows that youâre struggling to manage your debt. Missed repayments and defaults stay on your credit file for 6 years from the date they occurred.
2. County or High Court Judgements for debt
If you continue to not pay your loan or mortgage repayments, the lender can take you to court. They would only do this if you havenât responded to them, and they need to recover their money. When a lender does take legal action, the court decides how youâll pay back the debt. This is known as a County Court Judgement.
Once issued, a County Court Judgement will remain on your credit file for 6 years from the judgement date. This will contribute to you having an adverse credit rating.
3. Bankruptcy
When you are declared bankrupt, itâs recorded on your credit file. For the first 12 months of youâll be bound by the terms of your bankruptcy. During this time, you wonât be able to take out a mortgage or loan.
After the initial 12 months has passed, your bankruptcy will be discharged. But this will still be seen on your credit file for 6 years, which will have a big impact on your credit rating.
4. Repossession
When you fall behind on your mortgage repayments, you run the risk of having your home repossessed. The mortgage company would have to go to court to get permission to repossess your home. They would then sell the property to recover the money you owe, and youâd have to move out.
If a lender repossesses your home, itâll be recorded on your credit file and will remain there for 6 years. This would affect you in two ways:
- You’d find it hard to take out any further borrowing
- It could impact you when you try to rent. This is because landlords might look at your credit report to see if they can rely on you to pay the rent
5. You’re not on the electoral roll at the address you claim to live at
Not being registered to vote can have a negative impact on your credit score. Itâs one of the checks lenders use to identify you and to help prevent fraud. If you have adverse credit, checking this small fact can help to boost your credit rating.
6. Multiple applications for credit
Repeatedly applying for credit will bring down your credit score by a few points. This is because each time an applicationâs made, the lender might do a hard check on your credit file. This leaves a mark on your file that other lenders will be able to see.
Too many applications can signal to lenders that you’re desperate for money. Thatâs why youâre better trying to spread out any loan applications you make. New applications for credit will remain on your credit file for up to 12 months. And these add to a lowering of your credit score.
7. There is an error on your credit report
Whilst it doesnât 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 a simple thing like your address being incorrect. But if thereâs a mistake on there, it could contribute to you having an adverse credit rating.
Thatâs why checking your credit report regularly is worth doing.
If any of the above are marked on your credit file, you canât get them removed until theyâre officially deleted. And as seen, for most of these it can be up to 6 years. With an adverse credit rating youâll find it hard to borrow money. And if you can find a lender whoâll 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.
- Donât 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 youâve got adverse credit, there are things you can do to improve it:
- Try and pay down your debts as much as you can
- If you havenât got a credit history, try to build one â a credit builder credit card could help
- Register on the electoral roll
- Make sure there are no errors on your credit report. Even something simple like having the wrong address could affect a loan application being approved.
Final words
Adverse credit is when people have been struggling with debts and have built poor credit histories. Things that cause adverse credit include defaulting on loans or being declared bankrupt.
While adverse credit may make it difficult for you to obtain new lines of credit, it can also have other effects. For example, people with adverse credit may be charged higher interest rates or find it hard to rent somewhere.
Thatâs why it is worth being careful when you borrow money, and only take out what you can afford to pay back. By understanding what can cause adverse credit, you can take action to avoid it. And remember, if you donât need it, donât buy it.
Questions People Also Ask About Adverse Credit
Is a default classed as adverse credit?
A default is recorded on your credit file after payments have been missed. Both of these together can cause adverse credit.
If you had just one default and youâve paid back what you owe, your credit rating can recover. As time passes, the impact of the default will reduce if you look after your credit score. By managing your debts well your adverse credit rating could start to improve.
How can I clear my adverse credit?
If you want to clear your adverse credit, follow our tips above on how to fix it. But you need to be patient, repairing a damaged credit rating will take time. You need to show you can manage your money and you canât do that overnight. Every month you keep on top of your finances is a step closer to a good credit rating.
Disclaimer: The information given above is provided for reference only.