Mortgage Articles



Summary
When do have an “adverse” credit rating? The situation is far from clear but this article sheds light.

Adverse Credit – When is a credit history described as adverse?

Asim Bayorl 17/02/05

The term Adverse Credit is used to describe borrowers who have a history of unsatisfactory credit transactions. The expressions “sub-prime” and “poor credit” describe exactly the same situation. This begs a number of questions; what credit information is used, where does the information come from and how poor must a credit history be for it to be labelled as “adverse”?

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It's the credit reference agencies such as Experian and Equifax which collect information about you, then process it and sell it on. In fact any one with an authorised purpose as defined by Law, can pay to see your file. This includes lenders, insurance companies, banks, landlords, employers, any government agency and anyone you have asked to provide a product or service to you.

And you'll be simply amazed what the credit reference agencies know about you!

A typical file will have your name, date of birth and Social Security Number. It will also include your current and previous addresses, whether you're on the voters' roll, details of your current and previous employers, and information relating to your monthly payments on your credit cards, mortgage, hire purchase agreements and any loans you have. Then the file will store information from public records. Details of any Court judgements in respect of your debts will all be on file. Finally the file is topped off with records of the occasions you've applied for credit.

All this information is collected from two main sources: Public Records offices and data supplied by banks, building societies, financial institutions and other lenders offering credit accounts and lending facilities. And quite honestly, the agencies are documenting your credit track record from the first day you appear on their computer screens.

The credit reference agencies then supply all this information to anyone to whom you've applied for credit. They'll also credit score your data so that your lender can make a statistical decision on whether or not to grant you credit. Within this process your credit score becomes crucial.

Under credit scoring your track record is statistically assessed and awarded a number of scoring points based on your details on file. The more points, the better your credit rating. These points measure the probability that any credit offered to you will be repaid. It's based on the principle that it's possible to predict your future credit performance by analysing your past credit track record and statistically comparing that with the performance of other applicants who displayed similar characteristics. The points score then enables your prospective lender to calculate the level of risk and reduce the element of subjectivity in their lending decisions.

So now we go back to our central question - When is your credit history called “adverse”?

In practice it's the lenders and not the credit agencies that decide. Each lender has their own lending policy through which they fix what level of credit risk is acceptable to them. If your total credit score reaches a certain level, then you 'pass' their credit vetting. If you don't score enough points, that lender may either turn your application down or offer to lend you a smaller amount than you had applied for or charge you a higher rate of interest. The decision is theirs. Therefore what is acceptable to one lender may not be acceptable to another.

However, we can tell you some of the most significant black marks that will damage your credit score, the last two being the worst:

  • Arrears on your mortgage or other loans
  • Payments that are over 30 days late on your mortgage or other loans
  • County or High Court Judgements for debt
  • You're not on the Voters Roll at the address you claim to live at.
  • Multiple applications for credit
  • Recent Bankruptcy (undischarged bankrupts will always be refused credit)
  • Repossession

Lenders keep their detailed lending policy as a closely guarded secret but on mortgages especially, some will indicate which black marks could be acceptable.

At the end of the day, by reading this article, you will know whether there is likelihood that you will be judged “adverse credit” but often you cannot be sure until you've been turned down by a main line lender. If you do get turned down you'll have to turn to a sub prime lender who may accept you, especially if you are a homeowner, but will undoubtedly charge you a higher rate of interest for the privilege.


Therefore, it's important to build a good credit profile now which will show up through your credit score. This will prevent you from incurring extra costs and higher interest rates. So remember, if you do take out a loan, make sure you can afford it and maintain a perfect payment record. That way you'll build up a reasonable credit score.