6 Adverse Credit Situations Explained

November 4, 2022

If you have been refused a mortgage because of bad credit, you may be having difficulty understanding the reasons why. The world of finance can be full of jargon, and people who work in the industry sometimes forget that the average person might not be familiar with the terms that they use.

Here are some explanations for the most common causes of a poor credit record. 

What is adverse credit?

The term adverse credit refers to an individual who has a record of failing to meet loan repayments on time, or has missed payments. They may also have made late, incomplete, or missed (also called defaulted) payments for bills or other regular outgoings. There may also be more serious issues, such as bankruptcies.

Adverse credit is sometimes also called bad credit, or poor credit history. People with adverse credit usually find it more difficult to get good terms for mortgages and loans, because many lenders will see them as a risky client. 

Credit report

Each adverse event is recorded on a credit file or report, which is compiled by Credit Reference Agencies (CRAs) who collect data from financial and commercial institutions about your financial track record and activity. This includes any applications for loans that you may have made, and what the outcome was. 

Most of the information on your credit report will stay there for six years before being removed, so if you have had historic issues with your finances, they should not affect your current status.

Credit Score

 Each person who has a credit file also has a credit score, which is a number, usually between 0-1000. The higher the number, the greater your creditworthiness is deemed to be. The major CRAs in the UK (Experian, Equifax, and TransUnion) use slightly different criteria to assess your score, so there is no definitive number which defines your score.

You can check your personal credit score through using free online tools, although for detailed features some services ask for a monthly payment. Individuals with little or no credit history, such as young people who still live with their parents, may have a poor credit score through lack of evidence of financial activity, rather than adverse events. 

Defaults

One of the most common reasons for a bad credit history is a default on a credit agreement. This means that a payment on a bill or loan has not been made. In most cases, the creditor will send you a warning letter so that you have a chance to rectify the situation. If the payment is still not met, then they will report it to the credit reference agencies as a default. 

Defaults will stay on your credit file for six years, so it’s important to clear them straight away if possible. Unpaid debts may also result in legal action or repossessions.

County Court Judgements

County Court Judgements (CCJs) refer to a court order which tells an individual that they must repay a debt to a creditor. This is one of the steps a creditor may take if a warning letter about default payments has been ignored. If the CCJ is ignored, further enforcement action may be taken. 

The court will usually take into account your personal financial situation when the debt is repayment process is arranged, for example by agreeing a monthly payment plan at a rate that you can afford. If you can meet the repayment within a month, it may be possible to have the CCJ removed from your credit report. 

If you do not meet the debt repayments, the court may apply to have the money deducted directly from your wages. You could even face bailiff action, where your property may be repossessed and sold in order to pay the debt.

Debt Management Plans

Debt Management Plans (DMPs) are designed to help people pay off their non-priority debts. This includes things such as credit cards store cards, and loans. It does not include mortgage or rent arrears, utility bill arrears, council tax arrears, TV licence arrears, child maintenance arrears, or income tax arrears. 

DMPs can be useful to deal with all your creditors and make affordable monthly repayments which suit your budget. However, they will show on your credit history.

Individual Voluntary Arrangement

Individual Voluntary Arrangement (IVA) is a legally abiding agreement between you and your creditors to pay off debts at a rate that you can afford. Some priority debts, such as mortgage arrears and council tax arrears, can be included; however, it cannot be used to pay child support or student loan arrears.

If you would like to talk to IVA mortgage brokers, please get in touch today.

Your home may be repossessed if you do not keep up with your mortgage repayment

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