Adverse Credit: What Is It & How Does It Work?
Adverse credit history is the result of a continuous negative impact on your credit report that can be hard to shake. Understanding what adverse credit is and how it works is vital as it can influence your financial standpoint, interest rates, and borrowing options.
What is adverse credit?
Referring to negative credit history, adverse credit affects your ability to obtain loans, credit cards, or other forms of borrowing. Adverse credit is essentially a track record of poor repayment history, such as consistent late payments or large amounts owed, and is reflected in your credit report.
Is adverse credit the same as bad credit?
While adverse credit and bad credit are often used interchangeably, they are slightly different. Adverse credit is all about having a negative credit history, which is used in financial reports and indicates a broader range of poor credit events. In contrast, bad credit refers to your credit score itself rather than your credit history.
Related: What Is Bad Credit?
What causes adverse credit history?
Adverse credit history is typically caused by continuous missed payments on credit cards, loans or bills, which has a negative impact on your credit score. Other factors which could cause adverse credit history are:
- Defaults: When you fail to make a loan repayment, it’s considered a default, which impacts your credit score history. Read more in our guide to delinquency vs default.
- Accounts in Collections: Consistently missed payments may result in creditors sending accounts to a collections agency to retrieve the debt, which affects adverse credit history.
- High Credit Utilisation: Using a high percentage of available credit, such as on credit cards can signal financial distress and negatively impact your credit history.
- Bankruptcy: Filing for bankruptcy remains on your credit history for several years, causing adverse credit.
- Foreclosure: Losing a home due to missed mortgage repayments can also cause adverse credit history as it is a significant indicator of your financial reliability.
Read more: What Affects Credit Score?
How adverse credit history works
Each adverse item added to your credit report will have different effects on your score and history, depending on how often and how severe. For example, filing for bankruptcy might lower your credit score by over 200 points and stay on your credit report for over 5 years. Other occurrences, such as the occasional missed payment, are typically less severe and don’t last as long. Even if you have one or two “one-offs”, it can have a negative impact on your credit history, which may lead to a bad credit score.
How adverse credit impacts borrowing & interest rates
Having an adverse credit history, you might find it harder to be approved for borrowing. Because you are viewed as a risk, with a history of repeated negative credit impacts, you’re less trustworthy when it comes to borrowing, such as taking out a loan, credit cards, or even mortgages.
Those with adverse credit may have access to fewer loan options with tougher terms, such as requiring larger down payments, short repayment limits or requiring collateral. Additionally, loans you are offered will likely have higher interest rates compared to those for applicants without adverse credit, and you could even be denied a loan altogether.
Related: What Are Interest Rates & What Do They Mean?
How to find out if you have adverse credit
Knowing if you have an adverse credit history can help you understand where you stand financially when it comes to borrowing or improving your status. To find out, you can check your credit report online from either Equifax, Experian, and Transunion. This will show you your credit history, credit score, and any negative impacts on your report.
Related: What Information Is Included In My Credit Report?
Can you remove adverse credit?
While occasional negative impacts on your credit score may only stay on your report for a limited amount of time, adverse credit is more substantial and can be harder to remove. Depending on how severe your adverse credit history is, it can be visible on your credit file for up to 6 years. While you can’t remove occurrences from your report entirely, there are some ways you can improve your credit score while you’re waiting for your report to heal.
Here are some ways you can manage adverse credit:
- Pay off debts: Focus on paying off any debts you owe, especially those for which you’ve missed payments.
- Make payments on time: Pay any existing loans or bills in full and on time.
- Consider a secured credit card: As they require an initial deposit for collateral, a secured credit card can help to rebuild your credit. Make sure to only make small purchases and pay off the balance in full each month.
- Limit credit and loan applications: Avoid applying for too much credit or having multiple loans at once, as this can further impact your history.
- Work with a credit counsellor: Seek help with a professional who can provide advice and help you set up a plan to improve your credit history. You can seek free guidance on Citizens Advice.
A few small setbacks here and there won’t do much long-term damage, but the more negative marks you have, the more likely you are to have adverse credit, which can impact borrowing and interest rates for years to come. If you do have adverse credit, focus on building your credit score up by paying any loans or bills on time and avoiding further debt. To help, we have a lot of tips on how to be more money-savvy, such as money-saving hacks on our Good Vibes blog.
