Adverse Credit History Explained

An adverse credit history represents a record of financial mismanagement, labeling you as a borrower as high risk to lenders.

It includes a range of issues, like missed credit card payments and bankruptcies, typically resulting in automatic loan rejections or much higher interest rates.

How Adverse Credit History Works

In the current lending market, your credit report includes trended data, with banks looking at your financial behaviour over the last 24 months to determine your financial reliability.

The banks then use an adverse credit history as a weighted anchor when you apply for credit with them, checking up on the reports from the major credit bureaus like Experian, TransUnion and Equifax.

This means that any derogatory marks in the past two years then signal to an AI-driven algorithm that you represent a potential risk of a default, regardless of your current salary or debt-free status.

The Causes of Adverse Credit History

We mentioned that there a number of triggers that send adverse markers to lenders, but the vast majority of these today are lumped into five categories, including:

• Payment Delinquencies: Any credit card or loan payments that are 30, 60, or 90 days late will trigger an adverse marker, so make sure to always repay your credit on time if you want to avoid this.
• Defaults and Charge-Offs: If you’ve neglected your responsibilities enough for a lender to give up on collecting the debt and close your account, this is also a big adverse marker.
• CCJs and Bankruptcies: Legal judgments that stay on your file for six to ten years.
• High Credit Utilization: Utilizing more than 30% of your available limit is another major red flag for lenders.
• Hard Inquiries: The majority of credit card companies do a hard credit check when you apply for a new card, so having too many different applications in a short period of time indicates you’re in dire financial straits.

The Impact of Adverse Credit

While having lenders and banks flood your email or blow up your phone trying to collect debt from you is already stressful, the truth is that the consequences of an adverse credit history extend far beyond that.

For starters, borrowers that are marked this way face crazy interest rates. As an example, if someone without adverse credit would get a 4% rate on their loan, you might get a penalty rate of more than 28% in some cases, which we strongly advise you never agree on.

Another major potential issue can arise if you’re applying for a job in one of the sectors and industries that regularly run soft credit checks in order to assess the applicant's reliability, which can lead you to not landing the position you wanted.

If you’re renting in competitive urban markets like Los Angeles or New York City, you might face hurdles due to adverse credit, as landlords are increasingly using credit scores to filter out tenants.

Last but not least, adverse credit can and probably will have a big impact on security deposits, so you can easily be charged double for utility bills or mobile phone contracts.

How to Recover from Adverse Credit

While the issues you can run into with adverse credit can seem catastrophic, the truth is that  you can still recover from this through a few different approaches.

The most common first step would be to request an audit of your credit report. The most recent data shows that some 25% of credit reports contain errors, so you can easily fall into this percentage pool, which is why disputing zombie debts or incorrect late dates immediately can help a lot.

We already mention that your credit utilization ratio impacts credit history in a major way, so try and pay down your balances until the ratio falls below 30%. For references, a credit utilization ratio of under 10% is the gold standard for excellent credit scores, so it’s best if you try to move as close to this goal as possible.

Most people also do not realize that lenders can show lenience to borrowers, especially if you have a one-off mistake and an otherwise clean record. You can send a goodwill letter to your lender asking them to remove the stain from your record, as the truth is that many banks often agree to do so in order to keep you as a customer.

Lastly, you can get help with your adverse credit history through a credit builder loan. There are a number of companies operating in this space, and we can confirm that these solutions can actually help out in the long run.

Should You Use Credit Repair Services?

If you're drowning in paperwork, the idea of a credit repair specialist sounds like a lifeline. But the reality is that these firms actually cannot do anything you can do yourself for free.

In recent times, the FTC and CFPB have also cracked down on major credit repair companies for charging illegal upfront fees or making some impossible promises to their customers, so always keep this in mind if you still want to go this route.

Just make sure to avoid any service that demands prepayments or tells you to stop communicating with credit bureaus yourself. 

The only situation we can advise this approach for is when you’re having major issues with your credit history.

For example, if you have dozens of errors across all three credit bureaus and you just do not have the time or willpower to manage these issues, you can reach out to a reputable firm in this space, but only if you’re actually prepared and able to go with this much more expensive route.

Final Words

An adverse credit history is definitely something to avoid at all costs, as it can negatively impact your life in a multitude of ways. But it is also something that you can correct or improve, so make sure to foster the right mindset and approach your financial responsibilities in the right way to avoid ever having to deal with it.