You may have heard about adverse credit, but do you know what it means, and what causes it? In a nutshell, adverse credit means you’ve had negative information recorded on your credit history. As a result, your credit rating is poor.
If you find yourself with an adverse credit history, then you’re going to find it harder to borrow money. It might not be easy for you to take out mobile phone contracts or rent a property either. That’s why it’s worth finding out what adverse credit is so you can do what you can to avoid it.
What is adverse credit?
Adverse credit means you’ve got a poor credit rating with the Credit Reference Agencies (CRAs). The CRAs gather information about your credit history which they record on your credit file. If the information on your credit file is negative, it affects your credit rating.
The more difficulty you get into with paying back your debts, the worse your credit rating will be. This is what causes adverse credit.
Lenders will look at your credit file when you apply to borrow money. They’ll use one of the three main CRAs in the UK to do this. These agencies are:
- Experian
- Equifax
- TransUnion
If you’re not sure if you’ve got adverse credit, find out by checking what your credit rating is with all three agencies.
What information on my credit file causes adverse credit?
Adverse credit can be caused by a number of reasons.
1. Arrears on your loans or other debts
If you miss repayments on your loans or lines of credit, it’ll be recorded on your credit file. Missing two or more payments will mean you’re in arrears.
Having missed payments on your credit file are the things that hurt it the most. Being in arrears and having defaults recorded against you are among the main causes of adverse credit. And they stay on your credit file for 6 years from the date they happened.
2. County or high court judgements for debt
When you continue to miss payments on your debts, the lender might take you to court. They would only do this as a last resort to try and get their money back. And it’s usually because you haven’t talked to them about your situation.
If they do take legal action against you, the court will decide how you pay back the money you owe. This is what’s called a County Court Judgement.
If you receive a court judgement, it’ll be registered on your credit file and will cause you to have adverse credit. This judgement will remain on your credit file for 6 years, so it’s best to avoid it if you can.
3. Bankruptcy
Being declared bankrupt will have a big impact on your credit rating. For the first 12 months of your bankruptcy, you won’t be able to borrow any money. After this year has passed your bankruptcy will be discharged. But you’ll find it hard to borrow money while it’s still on your credit file. A bankruptcy order stays on your credit file for a total of 6 years.
4. Repossession
If you fall behind on your mortgage payments and you can’t bring them back up to date, you could lose your home. This happens when the mortgage company sells your home to recover their money. This is what’s known as a repossession.
A mortgage company would only ever take this action as a last resort. And to do so, they’d have to get permission from a court.
If this happens to you, you’ll find it hard to borrow money in future. At least for the 6 years while the repossession is recorded on your credit file. Having adverse credit in this way might also affect you when you try to rent somewhere to live. Landlords often check your credit rating to see if you can be relied on to pay the rent.
5. You’re not on the electoral roll at the address you claim to live at
Being registered to vote can make a difference to your credit rating. It’s one of the things lenders use to check your identity and it helps to prevent fraud. If you haven’t registered yet, it’s worth getting added to it. Being on the electoral role can help give your credit rating a boost.
6. Multiple applications for credit
Every time you apply to borrow money, the lender will check your credit report. When they do this, it leaves a hard check on your credit file. This means that its visible for anyone to see when they check your credit report. And it stays on there for 12 months.
If you make lots of applications close together it can bring down your credit rating. This is because it makes you look desperate for money. That’s why you should always try and space out any applications you make.
When you do want to apply for a loan or credit card, apply with lenders who you’re more likely to get approved with. You can do this by finding out if you’re eligible to apply first. The lender will let you know if you fit their criteria without leaving a mark on your credit file. They’ll only do a full check if you apply for a loan with them.
7. There’s an error on your credit report
Mistakes on your credit report are rare, but they can happen. If there’s something wrong on your credit file, it could affect your credit rating. Even something simple like your address being incorrect could stop you from being approved for a loan.
Keep a regular check on your credit report with all three Credit Reference Agencies. If you do spot an error, get it put right. You can do this by contacting the agencies and raising a dispute with them. They may ask for documents to support your claim, but they’ll come back to you with their findings within 28 days.
These are just some of the things that can be part of the reason you have adverse credit. That’s why keeping a check on your credit rating is worth doing as you never know when you’re going to need it.
Where do the CRAs collect information from that contributes to adverse credit?
Credit Reference Agencies collect their information from more than one source. The following are the most likely ones used.
- Public records
- Banks
- Credit card companies
- Loan companies
The information they collect shows how you manage your accounts with them. Although it’s not a legal requirement for lenders to report your activity to CRAs, most of them do. And you can’t stop lenders or banks from reporting to CRAs. But this can be a good thing if you’re looking after your accounts well. Paying your debts on time will go a long way in helping you improve your credit rating.
What can I do to improve my credit rating?
No matter how low your credit rating might be, there are things you can do to improve it.
- Make all your repayments in full and on time
- Try to keep your debts as low as you can. Borrowing below 30% of your credit limits can really help your credit rating
- If you’re new to borrowing money you might not have much of a credit history. If this is the case, try to build it up. A credit builder credit card can help you do this
- You can boost your credit rating by registering on the electoral roll
- Have a look at your credit report and check for any errors. Your credit report is free to check so it’s worth doing
Final words
To have adverse credit means there have been negative events recorded on your credit file. These might be late or missed payments, defaulted loans, or a court judgement made against you. When this happens, your credit rating will go down. This makes it harder to borrow money.
That’s why looking after your credit rating is worth doing. Managing your money and only borrowing what you know you can afford to pay back makes a big difference. By understanding what causes adverse credit, you can take action to avoid it. Think before you spend, if you don’t need it, don’t buy it.
Disclaimer: The information given above is provided for reference only. This is not financial advice.
