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Adverse Credit history – what does that mean to you?

If you have a perfect credit history and have never defaulted on a credit card, loan or mortgage payment, then this article will not apply to you. In this article, we are talking about ‘adverse credit', a term that is used to describe borrowers who have defaulted and been unable to satisfy the terms of a credit agreement. Also known as ‘sub-prime and ‘poor credit' – they all describe the same thing. The question is: how can you be labelled an adverse credit customer, how do they get the information about you, and just how far off course can your credit history go before it can be given the term ‘adverse'?

First of all, we will talk about the credit reference agencies, they are the people who get the information and pass it on to the lenders for a fee. The most commonly used credit reference agencies are Experian and Equifax. It's not just the lenders that can see your credit history either, anyone that has financial dealings with you or is to provide you with a product or service, can see your file. For example, insurance companies, banks, landlords, government agencies and employers have the right, as long as they have a purpose as defined by English Law.

Are you sitting comfortably? This is what they know about you:

your name, date of birth and National Insurance number;

your current and previous addresses;

whether you're on the electoral roll;

details of all your employers;

details of your monthly payments on credit cards, loans, hire purchase agreements;

details of your mortgage;

details of any unpaid County Court judgements

records of all loan and credit card applications, irrespective of whether you were accepted by the lender.

The credit reference agencies collect their information from the Public Records offices and also from the financial institutions themselves, eg banks, building societies and any other companies that could or have offered you credit. From the moment you get a bank account, you're on the public record, and your finances are there for people to access. If a financial institution or other party, as enabled by law, requests to see your credit history, then the credit reference agency will supply it.

Credit reference agencies also offer another useful function, they will give your data a credit score, using the lender's criteria to give your credit history a score which will ultimately decide whether or not you are eligible to receive credit. This is why your credit score is so important.

When a credit score is carried out on your credit history, your financial track record is given points for each criteria and how well it satisfies it. Obviously, the higher score you get, the better your scoring and the more attractive you become to the lender. For example, a history which shows you have always paid your debts back on time will give you a perfect credit score. These points are based on probability, in other words, the likelihood that you will repay the credit without defaulting. In effect, they are measuring your future ability to repay by your previous ability to repay, assuming that it will remain the same. They also compare your details to other applicants with the same characteristics as you, for example your age and demographic, to predict your future behaviour. It is basically an automatic decision, using statistics to match your details against criteria, and ensuring that the decision is based on facts and objectivity, and does not come down to a human decision (although this does happen in some cases).

The short answer to what an adverse credit history means to you, is that you might not be able to get credit. It's the lenders decision at the end of the day, not the credit reference agencies that supply and collate the information. The lenders all have their own criteria as to what is and isn't acceptable, and if your credit score doesn't reach the pass level, you will either be refused, be offered a lesser amount than you requested, or be offered credit on the understanding that you must agree to a higher rate of interest. Some lenders will refuse you point blank, others will offer alternatives as above – every lender is different. Here is a list of the factors that will, either alone or in conjunction with others, make it hard for you get to credit: loan, credit card or mortgage arrears, late payments on the above, County Court or High Court Judgements still unpaid, no entry on the electoral register at your given address, and multiple applications for loans and credit cards. There are two factors that will result in a definite refusal for a credit application: recent bankruptcy and having your home repossessed.

If you have any of the above problems and your application for credit is refused, you can safely assume that the lender has a strict policy relating to adverse credit. The one area that lenders can be more forgiving in is mortgages, especially if you are already a homeowner.

Reading this article should vastly improve your understanding of what the term ‘adverse credit history' means, and give you an insight into why you could be turned down by a main line lender. If you are refused credit, your only option may be to request credit from a sub prime lender. They may accept you, but you will pay a higher price for it.

Just remember, do your very best to always meet your loan, credit card and mortgage repayments. The consequences of defaulting could have far reaching and expensive consequences, as your credit score could well be adversely affected. The golden rule is – it pays to pay on time.

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