ADVERSE CREDIT

A brief summary of what adverse credit is and the different factors that may affect you and your credit worthiness

What does adverse credit actually mean?

Adverse credit means that you may have detrimental credit issues that could affect your ability to obtain credit or mortgages in general. There are a number of different types of adverse credit and we will try to cover these for you below to give you a better idea of each type of scenario and the affect this could have on you and your credit report.

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Missed payments

The most common type of adverse credit is a missed payment on an unsecured credit commitment. (A secured credit commitment means it is secured against a property, like a mortgage or second charge mortgage. Unsecured means it is not, like a personal loan, credit card, HP/car finance or store credit and online credit accounts like Klarna etc.)

The way in which you can be affected by missed payments will depend upon; the number of missed payments, the timeframe in which they were missed, the number of accounts affected and the balances on these accounts. For example, if you have missed the last 5 payments on your credit card account and these payments are for around £100 each, then the lenders in general will take a very dim view on this and it could potentially affect your ability to secure a mortgage. However, if you had one missed payment many years ago, then this could be considered further subject to the explanation of how this came about.

 

As you can imagine there are many variables when looking at adverse credit and missed payments in general. A mortgage broker will be able to review your credit report with you and look to tailor a solution that meets your specific needs and circumstances.

Defaults

A default is the next stage on from an accumulation of missed payments. This is a decision taken by a lender to record this on your credit record and can vary from only 2 missed payments up to normally, 6 missed payments before a default is triggered.

 

A default means that you have failed to keep up with your agreed repayments on a credit account and is now registered on your credit report via credit reference agencies such as Experian, Equifax and Transunion. This default will stay on your record for 6 years from when it is registered and will have a detrimental effect on your credit score as well as your credit report and therefore, your ability to obtain further financing, including mortgages. We can help you navigate your way around the market, matching you to lenders who are able to offer mortgage to clients with defaults.

Once a default has been registered, you can pay the account off and this will show as a satisfied default which, even though remains on your credit file, will show you have addressed the issue and closed the account. Mortgage lenders have specific requirements and products depending upon whether a default has been satisfied or not and would normally expect this to be the case. The danger of leaving a default unsatisfied (not repaid) is that the creditor could progress this default to a County Court Judgement (CCJ) which is even more damaging to your credit record.

County Court Judgements (CCJs)

This is a result of court action against you, by a person or company, due to money owed and not paid. You will receive a judgement in the post which explains, how much you owe, how to pay, the deadline you have to make payment and who to pay. If you receive a CCJ this means that a court has formally decided that you owe the money. This decision can be taken against you whether or not you attend the hearing or defend yourself. The CCJ will stay on your credit report for 6 years, unless you repay the full amount within 30 days of the judgement being made.

If you have a CCJ or several CCJs on your report this will affect your ability to obtain further credit in the future. You do have the ability to have a CCJ set aside (or cancelled) if you do not owe the money or if you did not receive, or did not respond to, the original claim from the court.

A CCJ can also be taken further to the High Court for collection of the debt owed, if no payment is made. CCJs can make it extremely difficult for you to qualify for most mortgage products. We have access to lenders who specialise in these areas and have specific products for people who may have been affected in this way. Get in touch to discuss your requirements.

Missed mortgage payments – Also known as mortgage arrears.

This is exactly what it sounds like, you have one or more missed payments on your mortgage account or second charge mortgage and includes other mortgages like Buy to Let mortgages or second homes.

Mortgage lenders will see any missed mortgage payments as high risk, as this means you have failed to keep up with repayments on your existing mortgage and this will need to be considered when considering a new mortgage application. Again, the number of payments, how recently they have been missed and the number of mortgage accounts affected will determine your overall risk to them and the availability of the new mortgage products open to you.

An explanation for how these mortgage arrears came about and what you can do to prevent this happening again in the future will be essential when looking at a new mortgage application. Get in touch with one of our advisers to discuss this further and find out what options are available to you.

Low credit score

Every credit reference agency has a way in which they rank you based on your credit profile, history, risk, and a number of other factors. This is called a credit score and shows the likelihood of your ability to obtain credit. Individual lenders also have their own internal credit scoring models which are not disclosed and are purely driven by lenders internal systems and can change over time depending on their own risk appetite and market conditions.

If you have any adverse credit history this will impact your credit score with both lenders and credit reference agencies and will result in a low score. Depending on the agency used, you can be scored differently, these are the ranges of scoring used by the different agencies:

 

Experian 0 – 999

Equifax 0 - 1000

Transunion 0 – 710

There are a multitude of different factors that can affect a credit score, and these can be summarised below:

Voter’s roll – Whether you are registered to vote at your address can affect your credit score, so make sure you are on the voters roll at your current address

Court records – Any records of CCJs, IVAs, Bankruptcies or other court debt problems will adversely affect your credit score.

Address history – If you have a number of addresses over a short period, this can also have an affect on your score. Make sure your address history, disclosed at application, is correct to ensure the best chance of success.

Financial associations – Anyone you are linked to by way of a joint credit account or credit search in the past (this can be a utility bill, bank account or even some forms of insurance) will then link you together. Any credit issues that they may have, could then also affect your score.

Credit accounts – Your repayment history of anything from bank accounts, loans, credit cards and mortgages through to car insurance, gym memberships, mobile phone contracts and utility bills will all affect your score. Private rental history is also now being added to credit reference agency reports and your rental repayment history may now also affect your credit score.

Number of previous searches – If you have been applying for a number of credit accounts over a short period can also affect your credit score adversely, so be careful when applying.

Get in touch with one of our expert advisers today to discuss your credit report and credit score to see what you can do to either improve it or maintain this to give you the best chances of success when it comes to applying for a mortgage or other credit.

IVA – Individual Involuntary Arrangement

What are they? An IVA is a formal debt solution, which is an agreement with your lenders for you to repay your debts over a specific period of time via an Insolvency Practitioner who will divide your money between your creditors.

The above is a summary of what an IVA is and not debt advice. This can be quite a complex area and we would recommend that you look for further advice in this regard from a qualified debt advisory service, a good place to start would be Citizens Advice or The Insolvency Service

DRO – Debt Relief Order

A DRO is a way of dealing with your debts if you cannot afford to repay them. This means that you can usually have up to 12 months where you do not need to repay certain kinds of debt. 

At the end of the DRO period, the debts will be written off and you will not have to repay them. If your circumstances change so that you can pay some or all of your debts, your DRO can be revoked so that you can arrange to pay your creditors.

The above is a summary of what a DRO is and not debt advice. This can be quite a complex area and we would recommend that you look for further advice in this regard from a qualified debt advisory service, a good place to start would be Citizens Advice or The Money Advice Service.

Debt Management Plans

A summary of what a Debt Management Plan is, can be described as an agreement between you and your creditors to repay all your debts. Debt management plans are usually used when either, you can only afford to pay creditors a small amount each month or you have debt problems but will be able to make repayments in a few months’ time, for example.

You can arrange a plan with your creditors yourself directly or via an approved/licensed debt management company for a fee. If you choose to arrange this with a company, you make regular monthly payments to the company and the company then shares the money out between your creditors accordingly.

The above is a summary of what a Debt Management Plan is and does not constitute debt advice. This can be quite a complex area and we would recommend that you look for further advice in this regard from a qualified debt advisory service, a good place to start would be the FCA register for approved Debt Management companies.

Bankruptcy

This is normally seen as a last resort when all other options have been explored or exhausted. You can apply for bankruptcy yourself or this can be forced upon you by a person or company that you owe at least £5,000 to. Being made bankrupt will have serious consequences and will affect your credit report and stay on your record for 6 years.

Once your bankruptcy order is over you can make afresh start with regards to your finances and in most cases will be after a year. You will not have to pay back the debts covered by the bankruptcy order.

You may, depending on your income, need to continue to make payments towards your debts for 3 years. If you want to borrow more than £500, you MUST declare that you are bankrupt and if you do not you will be breaking the law.

A bankruptcy will be published publicly, it could also have an effect on your own business (if you own one). You may need to sell your home and or your current privately rented accommodation could have its tenancy revoked and asked to leave the property.

This is a very serious matter and should be considered very carefully with the help of a debt advisory service. You can get more help and support in this regard by contacting Citizens Advice or The Money Advice Service.

If you have any concerns relating to any of the issues raised above, please do get in touch to see if we can help you further.