Adverse Credit History Defined

What Is an Adverse Credit History

An adverse credit history is a track record of poor repayment history on one or more loans or credit cards. Adverse credit history will be reflected in a consumer’s credit report. It will lower their credit score and make it more difficult to get a loan or credit card with the best terms or even to be approved at all.

Key Takeaways

  • An adverse credit history refers to a track record of delinquent debt, late bill payments, large amounts owed, and the presence of bankruptcy or charge-offs.
  • Those with an adverse credit history are likely to have low credit scores and be classified as subprime borrowers.
  • This can result in more difficulty obtaining credit and higher interest rates on loans.
  • A poor credit history can be rectified over time by establishing better financial habits.

Understanding Adverse Credit Histories

Adverse credit history is the result of numerous delinquencies reported to a credit agency on behalf of a borrower. Items that contribute to an adverse credit history include past-due payments, delinquent payments, charge-offs, collections, debt settlements, bankruptcies, short sales, foreclosures, repossessions, wage garnishments, and tax liens.

Many borrowers experience adverse credit events due to varying reasons. Each adverse item reported to a credit bureau will have differing effects on a borrower’s credit report and credit score. Effects from adverse items can range from a 240 point decrease to a 50 point decrease, depending on the occurrence. For example, a bankruptcy might lower a borrower’s credit score by 240 points and will stay on the credit report for up to 10 years.

Other occurrences with more substantial credit score decreases can include debt settlements, charge-offs, tax liens, and foreclosures. Payment delinquencies are typically the least severe, with approximately a 50 point decrease; however, ongoing delinquencies will result in a credit score deduction for each occurrence.

Those with adverse credit histories are likely to find it more difficult to obtain credit and may have to pay higher interest rates on loans or require subprime lending.

Other Considerations

Lenders and creditors care about adverse credit history because if a borrower has had credit problems in the past, they are more likely to have them in the future. As a result, lenders might not want to lend money, or they might only be willing to lend money at a higher interest rate than what they charge their lowest-risk customers who have no adverse credit history.

Borrowers can find out whether they have an adverse credit history by getting a free credit report from each of the three major credit bureaus, Equifax, Experian, and TransUnion. Credit card companies also offer customers the option to obtain a monthly credit score update through their services as well with the report having no effect on a credit score through a soft inquiry.

In the case of student loans, adverse credit history has a very specific meaning. It means that a borrower has 90-day delinquency on any debt or that they have experienced a specific adverse credit event within the last five years, such as a bankruptcy, repossession, or tax lien. Adverse credit history may make a borrower ineligible for a federal PLUS loan.

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