You may have heard about adverse credit, but do you know what it means? In simple terms, adverse credit means you have negative marks on your credit history. This results in a poor credit score.
If you have adverse credit history, you’ll find it harder to borrow money. You might also struggle to get mobile phone contracts or rent a property. It’s worth understanding what adverse credit is so you can avoid it or improve your situation.
What is adverse credit?
Adverse credit means you have a poor credit rating with credit reference agencies (CRAs). These agencies gather details about your credit history and store it in your credit file. When your credit file contains negative info, it hurts your credit score.
The more trouble you have paying your debts, the worse your credit rating becomes. This is what causes adverse credit.
Lenders check your credit file when you apply for a loan or credit card. They’ll use one of the three main CRAs in the UK:
- Experian
- Equifax
- TransUnion
Not sure if you have adverse credit? Check your credit score with all three agencies. Each one may have different info, so it’s worth checking them all.
How adverse credit affects your finances
Having adverse credit can limit your money options in several ways:
- Fewer borrowing choices: Many lenders may refuse to lend to you if you have bad credit
- Higher interest rates: If you do get loans, you’ll often pay higher interest
- Smaller loan amounts: Lenders may offer you less money than you ask for
- Rental problems: Landlords often check credit scores before letting property
- Service issues: Phone providers may ask for deposits
- Job challenges: Some employers check credit history for money-related jobs
What information on my credit file causes adverse credit?
Several things on your credit file can lead to adverse credit:
1. Arrears on your loans or other debts
Missing repayments on loans or credit accounts gets recorded on your credit file. If you miss two or more payments, you’re in arrears.
Missed payments harm your credit history the most. Mortgage arrears, late loan repayments, and defaults are common causes of adverse credit. These stay on your credit file for 6 years from when they happened.
Even missing the minimum payment on a credit card can hurt your credit score.
2. County or high court judgements for debt
If you keep missing debt payments, the lender might take legal action. This usually happens after they’ve tried other ways to get their money back.
If they take you to court and the court says you must pay, this is a County Court Judgment (CCJ).
A court judgment goes on your credit file and causes adverse credit. It stays there for 6 years and makes getting credit much harder.
3. Bankruptcy
Bankruptcy has a big impact on your credit rating. For the first 12 months, you can’t borrow any money. After this time, your bankruptcy is discharged.
You’ll still find it hard to borrow while bankruptcy stays on your credit file. It remains there for 6 years and is one of the worst forms of adverse credit.
4. Repossession
If you fall behind on mortgage payments and can’t catch up, you might get your home repossessed. This happens when the mortgage company sells your property to get their money back.
Mortgage companies only do this as a last resort. They need court permission first.
If your home is repossessed, borrowing becomes very hard for at least 6 years. This mark on your file also makes renting tough since landlords check credit ratings to see if you can pay rent.
5. You’re not on the electoral roll
Being registered to vote helps your credit rating. Lenders use this to check your identity and prevent fraud. If you haven’t registered, it’s worth doing to boost your credit score.
Not being on the electoral roll at your address can lead to adverse credit. Lenders can’t easily confirm who you are or how stable your living situation is.
6. Multiple applications for credit
Each time you apply to borrow money, the lender does a credit check. This leaves a “hard check” on your credit file. Other lenders can see this mark for 12 months.
Making many credit applications close together can lower your credit score. It makes you look desperate for money, which worries lenders. Try to space out your loan applications.
When applying for a loan or credit card, choose lenders more likely to approve you. Many offer checking tools that won’t affect your credit score but tell you if you might be accepted.
7. Errors on your credit report
Mistakes on your credit report aren’t common, but they happen. An error could hurt your credit rating. Even a wrong address could stop you getting a loan.
Check your credit report often with all three credit reference agencies. If you find an error, contact the agency to dispute it. They may ask for proof but will respond within 28 days.
Where do credit reference agencies collect information from?
Credit reference agencies gather information from many sources:
- Public records (electoral roll, court judgments, bankruptcy)
- Banks
- Credit card companies
- Loan companies
- Mortgage lenders
- Utility companies
This info shows how you handle your finances. Lenders don’t have to report your activity to CRAs, but most do. You can’t stop lenders from reporting to CRAs. This works in your favor if you manage your accounts well. Paying debts on time helps your credit rating and credit report.
Can I get loans with adverse or bad credit?
Yes, you can still get loans with adverse credit, but with some limits:
- Specialist lenders: Some lenders focus on helping people with poor credit history
- Secured loans: Using property as security may help your chances
- Guarantor loans: A family member can guarantee your loan
- Higher interest: Be ready to pay higher interest rates
- Small loans: You may only qualify for less money at first
Payday loans are another option, but they charge very high interest rates. Use these with caution.
How adverse credit affects mortgages
Getting a mortgage with adverse credit is hard but possible. There are adverse credit mortgages for people with poor credit history. However, these usually:
- Need larger deposits (often 20-25% of the property value)
- Charge higher interest rates
- Have stricter rules about what you can afford
- Come from specialist lenders rather than main banks
How much adverse credit affects your mortgage depends on:
- How recent the adverse credit events were
- How serious the issues are (defaults vs. bankruptcy)
- Your current money situation
- The size of your deposit
How to improve your credit rating
No matter how low your score is due to adverse credit, you can improve it:
- Pay on time: Always make repayments in full and on time
- Keep debts low: Try to use less than 30% of your credit limits
- Build credit history: If you’re new to borrowing, try a credit builder card
- Register to vote: This helps confirm your identity
- Check your credit report: Look for and fix any errors
- Avoid multiple applications: Space them out to prevent more damage
- Consider debt management if you’re struggling with debt
- Keep old accounts open: Length of credit history helps your score
- Pay bills on time: Some companies report these payments
How long does adverse credit stay on your record?
Most adverse credit stays on your file for 6 years:
- Defaults: 6 years from the default date
- CCJs: 6 years from the judgment date
- Bankruptcy: 6 years from the order date
- IVAs: 6 years from the start date
- Repossessions: 6 years from when it happened
- Missed payments: 6 years from the missed payment
- Hard credit searches: 1 year
After these times, the negative marks will drop off your credit file. Your credit score should improve if you’ve managed your finances well since then.
Final words
Adverse credit means negative events show on your credit file. These might be late payments, defaults, or court judgments. When these happen, your credit score drops. This makes borrowing harder and more costly.
Taking care of your credit rating matters. Managing your finances well and only borrowing what you can afford makes a big difference. By understanding what causes adverse credit, you can avoid it or improve your situation.
Remember, adverse credit isn’t forever. With time and good money habits, you can rebuild your credit history and boost your credit score.
Disclaimer: The information given above is provided for reference only. This is not financial advice.
