What Does Adverse Credit History Mean?
Updated: November 15, 2023 Author: Paul Gillooly
Quick answer: An adverse credit history means that a person’s credit report presents them as unfavourable customers to lenders. It’s caused by negative entries filed by previous creditors, usually due to missed payments. A result is limited access to borrowing options.
When you find yourself hitting barriers trying to access credit, adverse credit is a common cause. Any company you enter a credit agreement with can report how you manage your account to Credit Reference Agencies (CRAs). Entries filed are retained on your credit report.
Your credit report is used by lenders, and other businesses considering providing you with credit facilities to assess how you would manage the account.
All businesses have different criteria they use to score applicants, so an adverse credit history doesn’t restrict your access to credit completely. It does limit your options though.
Is adverse credit bad credit?
Adverse credit and bad credit are financial terms with the same meaning. It means that there are negative entries on your credit files. The other label this goes by is having a poor credit history.
However, muddying the situation is that adverse credit is not the exact same as having a poor credit history caused by financial mismanagement. You could be considered to have an adverse credit history if you no credit history at all.
In the case of thin credit histories, adverse just means that the creditor attempting to assess your level of risk can’t because there is no track record to assess. When you have a thin credit history, the solution is to build credit, for which there are specific financial products available.
How adverse credit histories work
To understand how adverse credit histories work, you first have to understand a lenders decision-making process.
When you apply for finance, the creditor runs a hard search of your credit file. The credit score shown by Credit Reference Agencies isn’t usually the deciding factor, because each lender has their own credit scoring systems. This is based on the information contained within your credit report.
Points are awarded for positive entries, such as on-time payments and having credit available. Points are deducted for negative entries, such as consecutive late payments.
As all lenders have their own credit scoring process and different benchmarks, it is possible to have applications rejected by one firm yet be approved by another without significant changes to your credit files.
When you know the cause of an application being rejected, you can be more selective about the types of credit you apply for by directing applications toward lenders likely to accept the risk your credit report presents.
How do I fix my adverse credit history?
You can’t erase history, but you do get to start again with a clean slate, eventually. Every entry filed by creditors with each of the Credit Reference Agencies remains on file for six years (sometimes longer), then drops off.
So do all of your accounts, though. You can go from having bad credit to having thin credit files if you lessen the number of accounts reporting your financial management to the CRAs. This could be through actions like minimising direct debits, using PAY & GO sims, or adding your name as a secondary card holder on someone else’s account. That becomes a financial association. It usually doesn’t help you build credit.
Fixing an adverse credit history is about rebuilding your credit report to show a history of on-time repayments across a range of accounts and maintaining a good debt-to-income ratio (<36%). With credit cards, maintaining a favourable debt-to-credit ratio (<30%) also helps, which means that you don’t max your card to the limit. You control your spending.
What lenders want to see is a history of on-time payments, preferably with zero defaults, late or missed payments, and certainly nothing serious.
Even after a truly debilitating experience like being issued with a court judgement, you can build your track record to dig your way back to affordable finance. It may take years, but the benefit is accessing more affordable financing options.
A good plan of action is to assess the total amount of outstanding debt, and then make a plan to pay debts down. Depending on the severity of your situation, it may be beneficial to take out a personal loan for debt consolidation to roll everything into one monthly payment.
Debt consolidation is the same as personal loans. On your credit file, they show as a credit account. It may be better to have a personal loan with on-time payments shown on your credit report than entering into an Individual Voluntary Arrangement or similar debt repayment scheme. The reason is, IVAs and any other negative entry denting your credit score restricts your ability to build credit for the six years that it’s on file.
While you are limited to higher-interest borrowing, budgeting, saving, and planning for larger expenses will serve you better in the long run.
In the short term, it is good practice to check your credit files for accuracy and have any inaccuracies corrected with each CRA.
Check these on your credit report:
Electoral roll status:
This must match your current address. It may be wrong if you’ve recently moved home.
Search History:
Hard searches are visible to lenders and happen when you apply to open an account. Soft searches aren’t visible to lenders. Use these for quotation searches as the main purpose is ID verification and an early assessment of your eligibility for a financial product. For both types, you need to have consented to your file being searched.
Check the company names of any that you don’t recognise. It could indicate someone else is attempting to apply for credit using your details. Also, limit the number of hard searches by leaving 3 to 6 months between finance applications. Too many applications run close together has a negative impact on credit scoring.
Reduce your debt-to-credit ratio by paying down balances
Your debt-to-credit ratio is based on your current balance deducted from your credit limit. Maxing out credit cards is referred to as overutilisation. On your credit report, listed under your “credit accounts”, each will show the limit on the account. Aim to use less than 30% of your available credit per active account. For example, if you have a £2,500 credit limit, aim to bring it down below £750.
Overutilising your available credit can indicate to lenders that your finances are stretched. By keeping accounts with credit available that don’t get used, your credit report presents you better as someone in control of their spending.
What causes adverse credit history
Any negative entry will lower your credit score. Low credit scores push interest rates higher because the causes indicate to lenders they are taking a risk when they take on a customer with a poor track record of repaying balances owed.
Public records are the most impactful for applicants with a bad credit history. These are contained in a section of your credit report and frequently filter applications out through automated processes, like online loan applications.
Negative entries with serious implications include CCJs, bankruptcies, IVA (Individual Voluntary Arrangement), Debt Relief Orders (England and Wales). In Scotland, similar records go by different names. Trust Deeds, Decrees, and a Debt Payment Program (DPP) are negative entries in Scotland.
Any of these records on your credit file will put you into an adverse credit history category.
An important note about settlement payments is that accounts shown as “partially settled” are a negative entry. It tells potential lenders that your account fell into default, but rather than staying in default, that you made efforts to rectify it. Rather than leave it in default, you negotiated with the company and reached a mutual agreement to settle the amount owed – at a reduced sum. The lender or creditor still lost revenue. As such, future lenders see that as bad credit, so they’ll assess you as being a higher-risk customer.
An adverse credit history to a lender just means they’ll consider you a higher-risk borrower. Specialist lenders are content to lend to high-risk consumers. The risk level is reflected in the interest rate offered.