Adverse Credit - When Is A Credit History Labelled As Being
"Adverse"?
If you are a borrower with a history of unsatisfactory credit
transactions, the lenders will describe your credit history as
"adverse". The expressions "poor credit", "bad credit" and
"sub-prime" all describe exactly the same situation. This leads
to a number of questions; what credit information is collected
about you, where does it come from and how bad must your credit
history be for it to be labelled as "adverse"?
It's the credit agencies like Equifax and Experian which collate
information about you and then process it. They are then legally
entitled to sell the information to anyone with an authorised
purpose as defined by Law. This includes banks, building
societies, credit card companies, other lenders, landlords,
employers, any government agency and anyone you have ordered a
product or service.
And you'll be simply astounded what information the credit
agencies hold about you!
A typical computer file will store your name, address, date of
birth and social security number. It will also include your
previous addresses, whether you are registered on the voters'
roll, details of your current and previous employers. They also
hold crucial information relating to your monthly payments on
your mortgage, hire purchase agreements, loans and any credit
cards you have. Then their computers will store information from
the public records. If you have any Court judgements in respect
of your debts, then the details will all be on their files. The
file is topped off with details of all the times you apply for
credit.
All this data is gathered from two chief sources: the Public
Records offices and records supplied by financial institutions
from throughout the UK. You can't escape their watchful eye.
Quite honestly, the agencies are recording your credit history
from the first day you show on their computer screens.
The credit agencies then sell this information to anyone to whom
you've applied for credit. As part of their service, they'll
also credit score your data. This enables your lender to make a
statistical based decision whether to award you credit. So
within this credit vetting process, your credit score becomes
crucial.
Under credit scoring your credit history is statistically judged
and awarded a number of scoring points. The more points you
have, the better your credit rating. These points measure the
probability that you will repay any credit provided to you. The
system is based on the principle that it's possible to predict
your future credit performance by examining your credit history
and statistically comparing it with the performance of other
applicants who have similar characteristics. The points score
allocated to you then makes it possible for your prospective
lender to calculate the level of risk in your application and
lessen the element of subjectivity in their lending decision.
So now we revert to our first question - When is a credit
history labelled as being "adverse"?
In practice it's not the credit agencies but the lender that
decides. Each lender has it's own lending policy through which
they define the level of credit risk which is acceptable to
them. If your credit score reaches a certain level, then you
'pass' their credit screening. If you don't score sufficient
points, the lender may either refuse your application or offer
you a smaller sum than you had applied for or offer you a higher
interest rate. The decision is always theirs - after all it is
their money! But as lenders each have different lending
policies, your credit score could be acceptable to one but not
to another.
However, we can tell you some of the main "black marks" that
will harm your credit score - the last two being by far the
worst:
You're not on the Voters Roll where you claim to be living.
Multiple applications for credit
Payments that are over 30 days late on your mortgage or other
loans
Arrears on your mortgage or other loans
County or High Court Judgements for debt
Repossession
Recent Bankruptcy (undischarged bankrupts will always be refused
credit)
Lending policies are central to a lenders business and as such
are highly confidential but on mortgages especially, some will
indicate that certain black marks might be acceptable.
All things considered, by reading this article, you should know
if there is a likelihood that you will be judged as an "adverse
credit risk", But in the end you cannot be absolutely sure
unless you've been refused by a main line lender. If you do get
turned down you'll have to apply to a sub-prime lender who is
more likely to accept you, especially if you own your own home -
but you'll definitely be charged a higher rate of interest for
the privilege.
All in all, it's essential to build up a good credit profile
that will reflect in your credit score. This then gives you
access to a wide range of credit facilities at reasonable
interest rates. So please remember, if you need a loan, make
sure you can afford it before you sign up and then maintain a
perfect payment record.