Adverse credit describes problems with a person’s credit history. You may also see it referred to as ‘bad credit’. These problems can be caused by things such as defaults, CCJs, late payments or bankruptcy. If you have adverse credit you will probably find it difficult to borrow money, this includes being accepted for a mortgage, second charge mortgage and/or unsecured credit.
Adverse credit lenders are specialist lenders who offer mortgages, and other financial products, to borrowers who other lenders won’t consider because of their poor credit history. Adverse credit lenders apply criteria that means their mortgage products don’t automatically exclude borrowers who have adverse credit due to factors such as CCJs, Debt Recovery Orders or bankruptcy.
Many adverse credit lenders only offer their products through intermediaries, i.e. specialist adverse credit mortgage brokers such as Simply Adverse.
In some ways the term ‘adverse credit mortgage’ is a bit of a misnomer as you won’t find a mortgage called an ‘adverse credit mortgage’. However, there are mortgage products that are more accessible to prospective borrowers with adverse credit than others. These are generally provided by specialist mortgage lenders and are often only available through specialist adverse mortgage brokers such as Simply Adverse.
Adverse credit mortgages can have higher interest rates than standard, ‘high-street’ mortgages but this will depend on your individual circumstances, and it’s always best to talk to a professional mortgage adviser about your options. Typically, the more recent the adverse credit recorded and the more severe, the higher the terms. If your adverse is historic and/or light, then you may qualify for high street terms or very close to these.
A Credit Reference Agency (CRA) is an independent body that holds secure data about you. This data includes things such as your credit applications and financial behaviour, as well as personal data such as date of birth, and current and previous addresses.
CRAs can provide this information to prospective lenders to help lenders determine how much of a risk borrowers may be, and also to confirm their identity. In the UK there are 3 main Credit Reference Agencies: Callcredit, Equifax and Experian. When you use a third party such as UK Credit Ratings to access your credit report, they use details from some or all of these CRAs to compile the report .
Your credit history is, as it sounds, the history of your credit activity. It is the information that is collected by the Credit Reference Agencies. A credit report (also known as a credit file) is a record of this credit history.
There are 2 types of credit report – a public credit report and a private credit report.
A public credit report is made up of information that is a matter of public record, such as Electoral Roll information and CCJs. A private credit report is more detailed and contains information that is only available to authorised lenders. When you request a copy of your credit report you will see a private credit report. How long information remains on your credit report depends on what that information relates to. Generally, information stays on your report for up to 6 years, although bankruptcies can appear for up to 10 years, depending on the type of bankruptcy.
A credit score is a number that is calculated on the basis of your credit report. In reality no-one has one credit score as each Credit Reference Agency uses a different scale to calculate their ‘score’ for you. A credit score however does give you a broad-brush indication of how good or poor your credit is, which in turn will suggest how easily you will be able to secure a mortgage or other form of credit.
When a lender repossesses an item that was used as security on a secured loan this is termed repossession. Most commonly we are talking about the repossession of a property following a mortgage going into default, although other items such as cars may also be repossessed.
A mortgage lender must go through a series of protocols before repossessing a property, these are set out in guidelines from UK Finance. The lender must follow a series of steps to try and resolve any issue satisfactorily, with repossession being very much the last step.
You mortgage lender is obliged to contact you and tell you how much you owe. It’s important that you don’t ignore communications from your mortgage lender regarding any late or missed payments as it is often possible to come to an agreement and put a payment plan together. Your lender must consider a request from you to change the way you pay your mortgage.
If you come up with an offer of payment and your lender turns it down, they must explain this decision within 10 working days. In addition, they must give you 15 working’ days warning, in writing, if they plan to start a court action to repossess your property. Even if your lender starts court action, you may still be able to come to a financial arrangement.
Once court action is started you will be sent a defence form with guidance about how to fill it in. This is your opportunity to explain why you think the lender should not repossess your home. This needs to be returned within 14 days.
You will also be given the date of your repossession hearing. You can bring an adviser or friend to this hearing and you should bring with you proof of your finances such as: -
The court will consider evidence from both you and your lender to determine whether a repossession order should be made. There are a number of decisions the judge can make.
Repossessions appear on your credit report for six years from the date of the order. After this period, it will be removed from your report. However, a lender may ask if you have ever had property repossessed, in this case you are legally obliged to answer truthfully.
If a payment is missed on a credit agreement (this could be for items such as credit cards, mobile phone bill, gas/electricity bills, car finance) the lender can class this debt as ‘default’.
If you receive a late payment letter, you are likely to be given a short period of time in which to make the payment before a late payment marker is reported to the credit reference agencies.
If you do get a letter, it is important that you make this payment as soon as possible and also double check with the lender that they won’t be recording this against your credit file. Don’t ignore this letter and leave the payment until the following month.
Each lender has different rules regarding how many payments need to be missed before they will declare the debt as default.
The most common criteria for setting a debt as default is missing three to six months payments. Once declared as default, the lender will end the agreement and can take additional action in order to collect the debt.
If the credit was secured with property such as your home or car, the lender can potentially take possession of that property and sell it.
For unsecured loans, creditors can only try to collect the outstanding amounts by taking legal action.
A default will appear on your credit report and stay there for six years even if you clear the debt. This will affect your credit score and will be taken into account when applying for credit, making it harder to obtain further credit.
Lenders may decline credit or apply more expensive interest rates as they see you as a bigger risk. Over time, this will have less impact on your credit score, until it disappears after the six years.
A CCJ is a court order which instructs someone to repay an outstanding debt. If one of your accounts goes into default, a lender can apply a CCJ against you in order to force you to pay.
If you receive a CCJ, it is best to seek advice immediately and not to ignore the letter.
The court can take into account your circumstances when they assess how you should repay the debt, for example, in one lump sum, or in monthly payments. Should you ignore the letter, the court will not be able to consider your circumstances.
If you receive a CCJ, you can get free debt advice from a specialist charity and they may be able to help you devise a payment plan. Once a payment plan is agreed, it is imperative that you maintain the instalments and pay in full and on time every month.
If you are able to pay the full amount of the CCJ within one month, you will be able to have the CCJ removed from your credit report by applying to the court with proof of payment.
If you are able to pay the full amount after one month, you can get the CCJ marked as ‘satisfied’ on your credit report. Lenders will be more likely to provide credit if a CCJ is recorded as ‘satisfied’, rather than left ‘unsatisfied’.
If you do not keep to the terms of a CCJ, the creditor can request that the court enforces the debt. This can be undertaken in a number of ways:
As with defaults, a CCJ will stay on your credit report for six years, with decreasing impact on your credit score as it gets older.
An Individual Voluntary Arrangement (IVA) freezes your debts and allows you to pay them back over a set period. Any money you still owe after this period is then written off.
An IVA can be applied for if you can afford to pay part of your debts but not the full amount that your creditors want.
An IVA is set up through an Insolvency Practitioner. In order to set up an IVA, you will need to show you have a regular long-term income as the repayments will usually cover a period of five to six years. Creditors then need to decide if they agree to the IVA, and this largely depends on your circumstances.
An IVA is a legally binding agreement between you and the people you owe money to. Once signed, neither you nor your creditors can back out.
You can use an IVA to help pay off many common debts, including: Overdrafts, Personal loans, Catalogue debts, Council Tax arrears, Hire purchase debts, Mortgage shortfalls, Credit and store cards, HMRC fees such as income tax or National Insurance contributions.
You can’t use an IVA to pay off:
Student loans, Magistrates’ court fines, certain types of car finance, Child maintenance or Child Support arrears.
You should not have to pay any up-front charges before your IVA has been set up.
In Scotland, there is a very similar arrangement that can be made, and this is referred to as a Trust Deeds. This allows you to make monthly repayments against your unsecured debts, but typically over a three year period.
Bankruptcy writes off all debts you can prove you owe, if you have any assets these will be taken and used to pay off your debts. This allows you to make a fresh start.
In order to apply for bankruptcy, you need to provide information about your debts, income, outgoings and any letters you’ve received from bailiffs or enforcement agents.
The application is then reviewed by an official adjudicator on behalf of the Insolvency Service. They then decide if you should be made bankrupt. It normally takes up to 28 days from the submission of your application to finding out the decision.
There is a fee to apply for bankruptcy (currently £680) that needs to be paid before submission of the application.
After a period of time (usually one year), most of your outstanding debts are written off and you are ‘discharged’ from bankruptcy.
Until discharged, you will remain under bankruptcy restrictions and won’t be able to apply for credit of £500 or more without advising the lender about the bankruptcy.
Any credit you do get is likely to be expensive both now and in the future.
Bankruptcy affects your credit score and credit reference agencies will keep your details on file for a minimum of six years.
A Debt Relief Order freezes your debt for a year, which is then written off completely if your circumstances haven’t changed.
It is only really suitable for those on a low income with very few assets. Your creditors are only likely to agree to a Debt Relief Order if it is unlikely that you will ever be able to clear your debts.
The criteria for a Debt Relief Order is:
You cannot apply for a Debt Relief Order if:
The debts you can use a Debt Relief Order for are called qualifying debts, and can include money you owe on:
The debts you can’t use a Debt Relief Order for include:
A Debt Relief Order is applied for via an approved person known as an intermediary.
There is a fee (currently £90) to arrange a Debt Relief Order, which can be paid in instalments over six months, but the fee does need to be paid in full before the application will be looked at.