What is adverse credit?

We know that having a good credit rating is important when you’re applying for a mortgage, as it plays a key role in guiding a lender’s decision on whether you are a ‘safe bet’ to lend to. But we don’t live in a perfect world and sometimes circumstances conspire against us, which can cause a negative impact on our credit rating.

Did you know that missing one credit card payment can stay on your credit file for up to six years? And, the more recent your financial hiccup, the more it impacts your credit score.

In this article, our expert team of financial advisers at PIL Southampton guides you through everything you need to know about adverse credit.

What does adverse credit mean? 

Adverse credit describes the situation when people have negative marks on their credit history – highlighting to lenders that you have had issues regarding managing your money at some point.

What is your credit history? 

Your credit history is a record of how you manage money, showing lenders how you’ve handled a previous mortgage, your utility bills, mobile phone contract, loans, credit cards and other debts, and the extent to which you’ve used your bank overdraft. 

Every time you apply for credit, make a payment (whether on time or late) or miss a payment, it’s all tracked on your credit file. This creates a source of information where lenders can get a picture of how reliable you might be when it comes to paying them back if they choose to lend to you.

Lenders source this information through credit reference agencies like Experian, Equifax and TransUnion.

Where do credit reference agencies (CRAs) collect their information? 

CRAs gather information on your financial behaviour from various sources including lenders, banks and utility companies. They use public records to check the electoral roll and to see if you have any markers like CCJs (County Court Judgements) and bankruptcies against your name.

How do you know if you have adverse credit? 

You can check your credit rating, and therefore find out if you have adverse credit, for free, by going to one of the main three credit agencies in the UK which are Equifax, Experian and TransUnion.

As each uses a different scoring system and they may each hold different information about you, we advise that you view your credit rating at all three websites.

They will let you know where they think your score sits in their range, i.e. poor to excellent, and will give you an idea why your score is what it is and what you can do about it.

What information on my credit file causes adverse credit?

These are the main reasons for having your credit file marked with adverse credit negative markers:

Defaulting on a loan – usually triggered when you have missed between three to six payments on a debt you have with a financial institution (referred to as arrears).

Late/missed payments – paying bills late (more than 30 days) or not paying them at all.

Charge-off – this can happen when you have missed many scheduled payments and a lender chooses to write-off your debt as they think you are unlikely to pay it back. This is very damaging to your credit score as it shows serious default behaviour.

Foreclosure (home repossession) – if you fail to keep up your mortgage repayments your lender could take your home. This act would have a significant negative impact on your credit score.

Bankruptcy – when you legally can’t pay your debts because you have been made bankrupt.

CCJs and IVAs – having a CCJ (County Court Judgement) against you, which is a legal order to pay money you owe or an IVA (Individual Voluntary Arrangement) against you, which is a formal arrangement to repay a debt.

Debt management plan – an informal arrangement for you to repay what you owe someone.

Multiple applications – if you are using a comparison website they might run a soft search on you so they can show you what products you might be eligible for, this wouldn’t be flagged on your credit history. However, if you formally apply for credit like a mortgage, credit card or loan multiple times in a relatively short period then this could get flagged as an issue for a lender. This is because it could make you look desperate for credit and therefore be a potentially higher risk.

Every time you formally apply to borrow money, the lender runs a credit check which leaves a ‘hard check’ on your credit file that other lenders can see for 12 months.

How does adverse credit affect my finances? 

Having a good credit history means that you are more likely to get loan and mortgage applications approved, and given better interest rates. Conversely, having a bad credit history – adverse credit – means that your mortgage or loan application could be turned down or, if you do get accepted, your options are likely to be more limited; you might only be able to borrow a lower amount and the interest rate you have to pay is likely to be higher as you are viewed as higher risk. 

How does adverse credit affect me and my lifestyle?

Some employers check your credit history before they offer jobs to candidates, particularly if the role involves handling money. 

Having adverse credit could also prevent you from getting a mobile phone contract, car finance, taking out an insurance policy, opening a bank account or renting a home from a landlord – all of whom are likely to run credit checks on you.

Borrowing with adverse credit 

Can I get a loan with bad credit? 

Yes, having a bad credit rating doesn’t mean that you will be turned down by every lender, however it will limit your options as fewer products will be available to you. There are lenders who specialise in providing products for people with poor credit.

Specialist loans available for individuals with adverse credit include:

Secured loans 

You use a valuable asset like your home as collateral.

Guarantor loans

If you unable to meet your loan payments, you have a family member who has committed to pay instead.

Credit builder loans

This helps you to establish or rebuild your credit history.

Bad credit personal loans

These have higher rates as they’re seen as higher risk, so it’s worth shopping around for the best deal at the time. An independent financial adviser like the team at PIL Southampton could help you to find the right product for you.

Warning: Be very careful of loan sharks and lenders who guarantee loans no matter what your credit history is as this is not standard practice for a legitimate lender. 

How can I improve my credit rating?

Pay your bills on time – setting up direct debits can be an efficient way to keep on top of admin and avoid missing payments.

Make sure you’re on the electoral roll and that your address details are up to date. 

Try to keep to the ‘30% rule’ – using less than 30% of your available credit (i.e. not borrowing over £600 on a credit card that has a £2,000 limit) reassures potential lenders that you’re not over stretching yourself. 

Don’t close old accounts – even if you don’t use them, keeping old credit card accounts open shows that you have a long credit history. Just make sure you’re not paying an annual fee or using the credit if you don’t need to.

Pay back more than the minimum monthly amount if you can, to show you are responsible and conscientious with how you manage your debt.

How can I fix my adverse credit history? 

It’s important to check your credit file regularly with credit agencies, in case there have been any errors, for example a payment being marked as late when you paid on time, or being linked to an account that doesn’t belong to you.

They may also have old information about you that should be removed, or maybe your personal details are incorrect.

How long is my credit file affected by negative markers?

Most negative markers on your credit file are removed after six years so be patient. Whatever your current position, if you do what you can to make sure your credit report is accurate now, and you create good habits moving forward, your financial position will get healthier by the day. This, in turn, will open up more financial opportunities for you with better rates.

How PIL Southampton can help you 

Our expert team of financial advisers is very experienced in helping our clients with their credit rating, make sure that you are doing everything you can to get the highest score.

How you can contact PIL Southampton

You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.