Alternate name: Bad credit, bad credit history
You may also hear adverse credit history referred to as having bad credit. This means that your credit report reflects somewhat recent negative credit issues, such as:
Making late payments on your debt Having unpaid debts ending up in collections Experiencing a mortgage foreclosure Having a car repossessed Filing for debt bankruptcy relief
For example, if you were unable to make your car payment for several months, this will show up in your credit report. Depending on how long ago it happened and what other entries are shown in your credit report, you may have an adverse credit history as a result.
How Having an Adverse Credit History Works
Credit scoring companies such as FICO use the information shown in your credit reports to arrive at your credit score. FICO weighs factors such as the amount of money you owe, the length of your credit history, how much new credit you’re carrying, the type of debts you have, and your payment history to determine your credit score. Some factors are given more importance than others. For instance, your payment history is 35% of your credit score, while the length of your credit history is 15% of the score. The severity and time period of credit problems can also determine if you have an adverse credit history. For example, if you were only one month late on your car payment several years ago but paid your car off as agreed and haven’t had any problems since, your credit score may not be affected and your credit history may look good. On the other hand, if you were so late on your car payments that your car was repossessed by the lender within the past few years, you’ll likely have an adverse credit history. If you have an adverse credit history, lenders and other credit evaluators have decided it is risky to extend credit to you because you may have too much debt, pay your bills late, or both. Riskier borrowers with adverse credit histories tend to have a harder time getting credit, have fewer credit choices, and receive higher interest rates when and if they are extended credit. While lenders and other entities will use credit scores and credit reports from agencies such as Experian, TransUnion, or Equifax to make a decision on whether to extend credit to you, each lender has its own formula for making these decisions.
What an Adverse Credit History Means for You
Having an adverse credit history can lead to being rejected for loans, including a student loan or a mortgage. If you’re rejected for something because of your credit report, you will receive an adverse action letter (also known as an adverse action notice) explaining why you were rejected. It is required by the Fair Credit Reporting Act and the Equal Credit Opportunity Act that consumers are given a reason for a denial, alongside resources and context regarding how they can improve their credit history. In accordance with federal law, an adverse action letter must be made electronically, orally, or in writing. This letter will not only alert you to where your credit score currently stands, but to what areas of your credit report that you need to work on. Adverse action letters must include the following information:
Name, address, and phone number of the credit reporting agency that supplied the credit report used to make the decisionReasons for the denial—this can include up to five reasonsNotice of your right to access a free copy of your credit report within 60 days and how to get it from the reporting credit bureauNotice of your right to dispute any potential errors on the credit report provided by the credit reporting agency
What To Do To Improve Your Adverse Credit History
If you have an adverse credit history, first look into why. Get a free copy of your credit report through AnnualCreditReport.com (usually one per year, but one per week during the COVID-19 pandemic) and read through it to see what is causing you to have poor credit. Look at your credit score, too, and see where it stands. You can likely get your credit score through your bank or credit card company, such as in the mobile app. Then, put a plan in place to start building and improving your credit. One way to get started is to make all credit card payments on time and in full (if you can). If that’s too much, pay what you can toward that debt and stop using your cards to lower your utilization rate. The debt avalanche and debt snowball methods are two strategies to consider. Keep taking steps, no matter how small, toward paying off loans and debt. If you’re still struggling, contact your lender or credit card company to see if you can refinance, lower your monthly payment, or put a debt management plan in place. An adverse credit history doesn’t have to be with you forever. Negative marks on your credit report will fall off eventually. While it can take up to 10 years for a bankruptcy to be removed from your credit report, other delinquencies may disappear after seven years. Keep making smart money moves and you’ll get to a better place with your credit in time.
