What is Adverse Credit?

What is adverse credit?

Adverse credit (known as ‘bad credit’) is a negative mark on your credit report. It happens when you've had a poor repayment history on things like loans, credit cards and other financial commitments. You can also get adverse credit if you have little or no credit history. 

Your credit rating is summarised by a score. The lower your score, the ‘worse’ your credit is. Having a low score can make it harder to borrow money or get approved for things like a mortgage, but it’s not impossible.

What causes adverse credit?

Adverse credit will have a negative effect on your credit score so it’s good to know what causes it. Here’s the main issues that cause adverse credit:

Too many credit applications at once

If you apply for lots of loans or credit cards too close together, it’ll bring your score right down. Lenders can see when you’ve applied for credit, and too many applications at once can suggest you’re too reliant on borrowing. If you need a credit card or loan, make sure your applications are spread out a little. 

Late or missed payments

A late payment is when you don’t pay a bill when it’s due. When it comes to late payments, there’s a difference between forgetting to pay on time, and being unable to pay on time. A late payment isn’t the same as a missed payment or arrears. A late payment is just that: a payment that you did make, you just didn’t make it on time. This difference is important for understanding how it affects your credit file.

For example, let’s say your next credit card payment is due on the 1st of the month, but you wait until payday on the 7th to pay it. It won’t be marked by your credit card company as a late payment in most instances, because the payment’s been made before the next one is due. A payment can only be recorded as late 30 days after it’s due.

Defaults

A default happens when your account with a creditor (people or company you owe money to) is closed because you’ve repeatedly missed payments and an outstanding balance. For example, this could be on a credit card, mobile phone provider or utility company, rent or a mortgage. You can get a default on your credit history regardless of how much money you actually owe. For example, it’s possible to get a default for a very small amount.

The way you end up with a default is the creditor (the person or company you own money to) will have made an attempt to reclaim the money. And a default happens after a period of missing payments for three to six months, sometimes longer, but this very much depends upon the creditor’s own terms.

You’ll usually have been sent a default notice before your account being closed – and this is essentially a request for you to repay your balance before further action is taken.

Debt Management Plans

A Debt Management Plan (DMP)  is an informal agreement that's made between yourself and a creditor to pay off unsecured debts in instalments over time.

It's not a legal agreement and can be cancelled by either party at any time. 

It can be arranged either directly with a creditor or through a debt management company. If you go through a debt management company,  you have the option to pull all your debts together and repay more than one creditor.

DMPs can't be used to repay things like mortgage, rent, council tax or utility bills, but can help settle money owed on credit cards, bank loans, mobile phone contracts or store cards. 

Payday loans

A payday loan is a short-term loan, usually coming with a high interest rate. On their own, payday loans aren’t actually a bad credit issue and don’t reduce your credit rating if you’ve paid them back on time.

But when it comes to applying for things like loans or mortgages, payday loans can be a red flag for lenders. Lenders base all their decisions on risk, and people with a history of payday loans are seen as higher risk. Some lenders think relying on payday loans to cover your everyday living expenses means you’ll struggle to keep up with your repayments. 

County Court Judgements (CCJs)

A CCJ is a court order that is served against you when you fail to repay money that you owe, usually after other attempts to recover debts have failed. You'll be required to pay off your debt either in instalments or in a single lump-sum.

After your CCJ has been 'satisfied' (meaning fully paid) it'll show on your credit file for six years. Which can make applying for any type of credit, including a mortgage, and other financial products more difficult because you are seen as a higher risk than someone without a CCJ. 

Individual Voluntary Agreements

An IVA (Individual Voluntary Arrangement) is a legal agreement between you and the people you owe money to. It lets you repay your debts over an agreed time period. 

An IVA goes on your credit file and brings down your credit score. But the benefit is that your debts are frozen and no more interest accumulates, which means you can make manageable repayments. 

An IVA gives everyone involved a clear timeline for when the debt will be repaid. When the IVA agreement comes to an end, you'll be free from the commitments to your creditors.

Repossession

When your home is or car is repossessed, it stays on your credit report for six years. 

A repossession will negatively impact your credit rating when it happens. Your credit score will improve in time as the repossession gets further away as long as you’re careful to improve your score during this time. 

Bankruptcy

Bankruptcy is a legal process that happens when you're unable to repay your debts. After being declared bankrupt, you'll be relieved of your debts, but you wont be able to borrow money until you're discharged (usually one year), and the impact on your credit score means it’ll be harder to get approved for things like loans and credit cards.

How do I know if I’ve got adverse credit?

Checking your credit report is the best way to find out if you have adverse credit. There are three main credit agencies in the UK; Experian, Equifax and TransUnion, and they all calculate things a little differently. 

Along with personal information such as your age, date of birth and address history, your credit report includes a list of your credit and bank accounts, as well as any utility company debts or outstanding loan agreements. Your report will also show if you’ve missed any payments or have been a little late. You should always try to keep on top of your credit repayments as missed or late payments will stay on your credit report for at least six years.

checkmyfile* is a great tool to use if you want to see how you rank with the big credit agencies. They’ve been around for over 20 years helping people understand their credit history, and is the UK’s top ranked credit report service on Trustpilot.

If you’re worried about adverse credit affecting your mortgage chances, make an enquiry to speak with one of our Mortgage Experts. They’ve seen it all, and have plenty of experience with bad credit mortgages. 

*Heads up, when you click through to our affiliate links, we may earn a small commission at no extra cost to you. We only recommend sites we truly trust and believe in.

Errors on your credit report

When checking out your credit report you may see some errors or mistakes. Don’t worry, this is unfortunately pretty common and can usually be put right.

Your credit report is normally updated every month as all of your lenders - including your bank and credit accounts - report your data to the credit reference agencies. If something doesn’t look right, perhaps there’s a closed credit account still on there or it’s showing an incorrect late payment. Make sure you take it up with the credit reference agencies (Experian, Equifax, TransUnion) or contact the company that may have made the error to correct it. Many of the credit reporting agencies even allow you to raise a dispute on their website.

Can I get a mortgage with adverse credit?

Yes, you can get a mortgage with adverse credit! Applying for a mortgage can feel daunting, and there’s more to consider if you have issues in your credit report. Most high-street banks aren’t set up to deal with people who have credit issues, and so they might turn you down unnecessarily. You’ll just need to apply to a lender that has experience lending to people with adverse credit. They’re out there, but because they’re more specialist, they’re mostly only available through specialist mortgage brokers - like us! 

Read more about getting a bad credit mortgage, and how you can give yourself the best chance of getting accepted.