What is adverse credit?
Adverse credit is a common term in loan finance, describing the poor performance history of someone’s money management.
The dictionary definition describes adverse as preventing success or development; harmful; unfavourable, which sums up precisely how poor credit scores affect an applicant’s ability to achieve new credit at favourable rates.
Adverse credit is a negative term associated with low credit scores, indicating that these borrowers may be unreliable with money and are likely a high risk to credit providers.
So, what does adverse credit look like and if our credit scores aren’t looking too healthy, what can we do about them?
How does adverse credit affect your credit score?
Your credit report (or credit history) is your track record of how you managed your credit and banking history over the previous six years.
Three major agencies provide credit scores: Equifax, Experian, and TransUnion. Each agency calculates its score in its own way, so your scores will likely differ. Providers will contact their preferred agency to check your history, so it’s a good idea to check your scores with each of them for any inconsistencies.
When you apply for a loan, credit card, store card, mobile phone contract, car finance, mortgage, or one of the hundreds of other finance agreements, the provider checks your credit score to determine whether you’re an appropriate risk. They then predict your ability to repay the loan using the information in your credit history, with many applications being immediately rejected when an applicant fails to hold the relevant score.
You lose points from your credit score for every poor financial action you make. Despite not having a cut-off or particular score that dictates adverse credit, those holding such low scores classify as risky, ‘subprime’ borrowers.
What financial issues affect a credit score?
All kinds of things affect a credit score, but not all of them concern your finances.
For example, you'll lose points if you move home too often or aren’t on the electoral register. If any of the information on your report is inaccurate, like your address is incorrect or there are outstanding issues that have since been resolved, you’ll lose points. You'll lose points if you’re associated with or shared an account with someone with a low credit score. Even if you’ve got a healthy amount of savings in the bank but never had a credit card, set up a standing order or direct debit to pay household bills or utilities, you’ll lose points.
Credit agencies want to see that you can handle your finances, so expects to see you use credit responsibly to make utility payments, pay your mobile bill, insurance, and even overdraft payments on time as required.
If you’re late with a payment on a store or credit card, you may drop a point or two, but if you miss a payment on your mortgage, you’ll drop a lot more. The seriousness of each transgression dictates the number of points you’ll lose and the new balance of your credit score.
More serious transgressions include:
- Delinquent payments/payment arrears – You are consistently behind or have regularly made late payments.
- County Court Judgements (CCJs) – Court orders demanding you repay a debt to a credit provider.
- Individual Voluntary Arrangements (IVAs) – An agreement that you’ll repay the outstanding debt over a set period.
- Bankruptcy – You’ve written off large debts to one or several providers. While bankruptcy offers a fresh financial start and might help you get back on your feet, it can stay on your credit report for up to 10 years.
- Foreclosures – When a debt collector takes control of an asset to cover unpaid debts. This can be property, land, a vehicle, or even antiques, art, jewellery, and personal belongings.
- Defaulting on loans – Failing to pay loans, mortgages, or other credit.
Nobody plans to get into financial trouble, with many debt issues resulting from unforeseen circumstances, emergencies, or one of life’s misfortunes. For example, nobody intends to lose their job, get ill, or have to find the money for emergency property repairs, so it’s always best to speak to lenders as soon as you think you might be in trouble; there are often solutions available that you might not be aware of.
How do you check your credit score and credit history?
You can check your credit scores online. There are apps available for each agency, and plenty of bank account apps show your credit score as part of their package.
Usually, the app or service you use to view your credit score, report, and history will rate your score from very poor to excellent, with a few select steps in between. They’ll also suggest ways to improve your score and the type of credit and loan products you’re likely to be accepted for.
How do I know if I have adverse credit?
If you’ve missed loan payments, failed to meet your mortgage or rent, or been through court action or a debt collection situation over the previous six years, you will likely be in the adverse credit region.
What’s adverse credit look like on a credit report? While no solid line is drawn to determine an adverse credit score, very poor and poor scores will cause problems acquiring new loans or mortgages.
How long does adverse credit last?
As stated, bankruptcy can stay on your credit report for up to ten years, but most other issues will be removed automatically after six years.
What’s so beneficial about a good credit score?
The higher your credit score, the more options will open up to you. As a responsible borrower with a good credit score, you’ll have far fewer problems being approved for loans and mortgages and achieving the most preferential interest rates.
How can you improve your credit score?
The best way to improve your credit score is to show healthy money management skills and financial behaviour.
- Pay your bills on time.
- Don’t take out unnecessary credit.
- Keep your total credit use well within your personal limit.
- Pay off existing debt—starting with those that make the most impact on your report or those with the highest interest rates.
- Make regular and on-time credit card payments.
- Be on the electoral register.
- Make sure all your credit report details are correct and up to date.
- If you think you’re likely to struggle with payments, talk to your lenders. Arranging an alternative schedule can help you avoid a negative balance and poor reporting.
When you apply for credit, the provider performs a 'hard search' on your credit file. Making too many applications—regardless of whether they’re accepted or rejected—can cause a temporary dip in your score. This makes you look desperate to lenders and suggests reasons for concern.
To combat this, using eligibility checkers before an application performs a soft search, one that doesn’t affect your score or appear on your report yet provides a good estimation of your approval chances.
The best way to ensure healthy financial behaviour is to create a monthly budget plan and stick to it. Your credit score judges you on your long-term performance, so there are no easy or quick fixes, just long-term healthy financial practices.
Over time, each activity will help improve your credit score, and eventually, any serious transgressions will be automatically deleted (after six years). But, of course, you mustn’t add any more arrears or offences in the meantime if you want to see your score grow.
Can I get a mortgage with adverse credit?
Yes, you can, but be prepared to put some extra effort in, as adverse credit affects all loan and mortgage applications.
The lower your credit score, the harder it is to achieve approval for a mortgage, credit card, loan, overdraft, car finance, and more. If you are approved for any of these credit options, they’ll likely come with higher interest rates to minimise the risk to their provider.
However, all is not lost. Some specialist lenders are willing to work with applicants with adverse credit. They’ll need to understand how you arrived at such a low score and how you recovered. They’ll also expect you to prove that you can afford to make their loan and mortgage repayments around your other financial commitments. They may still offer lower credit limits, expect larger deposits, and charge higher interest rates.
On the plus side, if you stick to your mortgage plan without a hitch, you’ll prove that you’re a better risk than expected, and you may be able to renegotiate a better deal in future at a fixed rate option renewal or remortgaging with a new provider.
A healthy credit report is a great asset when securing a mortgage at preferential interest rates. However, if you have fallen into financial problems, it doesn’t mean the end of your mortgage journey. We work with many specialist providers, plenty of which understand the difficulties life delivers and are open to helping you raise the money to buy your home.
Do you have any adverse credit issues or questions about your situation or mortgage application? Drop us a line or give us a call, and we’ll explain how they might affect you and all the possible solutions to those potential problems.
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