If you have a history of unsatisfactory credit transactions, then you can be described as someone who has an adverse credit history. The situation is also commonly called ‘sub-prime' and ‘poor credit' by all types of lenders. The following questions are therefore raised: what information do they use and where do they get it from, and at what point does an ‘unsatisfactory' credit rating become ‘adverse'?
Experian and Equifax, the main credit reference agencies, are continuously collating details about your finances, which they then process and sell to lenders when they ask. It is a little known fact that it's not just lenders who can see your financial files: lenders, insurance companies, landlords, employers, banks and anyone with a purpose as defined by English Law, can see your credit history. Also, people that you ask to provide you with a product or service have the right to ask to see your financial history.
We guarantee you'll be very surprised at how much detail the credit reference agencies have on you!
Here's an example of what a typical file would contain: your name, date of birth, National Insurance number, your current and previous addresses, whether you're on the electoral roll, information about your current and previous jobs, and details on your monthly credit card, mortgage, loan and hire purchase payments. The file will also contain information from public records, such as Court judgements on any debts you may have, for example Council Tax. Surprisingly, the file will also contain details of every time you have applied for credit, whether the application was successful or not.
All the above information is sourced from Public Records offices and most significantly, data supplied by various financial institutions which lend you money and process your money on a daily basis. As soon as you get your first bank account, your name and details become known to the credit reference agencies, and this never ends, as long as you are putting your money through financial institutions.
The credit reference agencies keep all this information and store it, waiting to give the lenders what they need to know when you apply to them for credit. They also provide an additional service to the lenders, using their criteria to give you a credit score, which enables the lender to immediately see if you fit their lending profile, based on statistics. Scoring well on a credit score rating is very important as otherwise the lender won't even get as far as to consider your application.
To provide you with a credit score, the credit reference agency assesses your financial track record and awards you points for each time you meet the criteria. Naturally, the better you score, the more chance you have of getting credit. The points system is designed to ascertain the probability of you being able to repay your loan. It is quite simply assuming that your future financial situation and ability to repay will match your past financial situation. They also compare you on a statistical level with other applicants who have a similar financial profile to yours. The resulting credit score gives the lender the information they need to calculate how much risk you represent to them, culminating in what is effectively an objective decision based on your projected ability to repay.
So now to return to the question in point – at what point does your credit history become ‘adverse'?
In practice it's the people that you're borrowing from, not credit agencies like Experian and Equifax that make the decision. Every lender has an individual lending policy and they have their own criteria which sets out what level of credit risk they are willing to accept. If your total credit score reaches or surpasses their pass level, then your application will have been successful. If you fail to score the right amount of points, then the lender can either refuse your application, lend you less than you asked for, or stipulate that you must pay a higher interest rate. It's their decision, and it's a decision that can vary greatly from lender to lender.
Here's a list of the most significant factors that will contribute to an adverse credit score, the first two being the worst:
Recent Bankruptcy (if you are an undischarged bankrupt then there is no chance of getting any credit).
Repossession of your home.
Mortgage or loan arrears.
Over 30 days arrears on a mortgage or loan payment.
County or High Court Judgements for unpaid debts, eg Council Tax.
Your name is not listed on the electoral roll at your given address.
Frequent credit card and loan applications.
Lenders do not make their lending policies known to outside parties, they are very secretive about them, however they may be more open about what adverse credit issues they will allow when it comes to mortgage lending.
Ideally this article will have helped you ascertain whether or not you are likely to be judged as an adverse credit customer. However, in practice, if you are turned down by a lender they won't give you a reason why, especially the big name, mainstream lenders. If you do get turned down and there are no other options for credit, you may have to settle for a ‘sub prime' or ‘poor credit' specialist lender who will charge you higher rates of interest, aware that they are your last resort.
The bottom line is, it's extremely important to secure your credit rating and be very careful not to do anything that might affect it. This will save you a lot of money in future as you can take advantage of the most competitive interest rates. So next time you get a credit card or a loan, remember to keep up your monthly payments and always pay on time, it will go a long way to keeping your credit score high and healthy.
