What does an adverse credit score mean? Everything you need to know

An adverse credit score means a poor credit rating, which implies that you made defaults or delayed payments previously. A good credit score is a must when it comes to qualifying for a loan. Normally, lenders peruse your credit report because it suggests your past payment comportment. This gives them an idea of how likely you will continue to make payments in the coming months. If your past payment record is terrible, your credibility will be called into question.

Scepticism raised on your repaying capacity would restrict you from borrowing a large amount of money, and if you try to borrow a small amount of money, you will end up with a high interest rate.

A credit score should be good because it convinces a lender that you are a responsible borrower. They would be able to sign off on your loan application without any scepticism. There are chances of getting money at lower interest rates. A good credit score also improves your chances of borrowing a large amount of money.

What is a bad credit score?

There are three credit reference agencies – Experian, Equifax and TransUnion. All these agencies maintain the record of your credit collected from your lenders. Every agency uses its own formula to calculate your credit score. Because all agencies have different information, the credit scores calculated by them vary.

However, it is not possible that if your credit score is stellar, according to Experian, you will be called a subprime borrower by Equifax. A bad credit rating depends on multiple factors, such as:

Payment history – of course, if you make a default, you will end up losing your credit points.

A number of credit inquiries – when you apply for a loan, hard checks are made, and each time you put in a loan application, your search footprints will be recorded. They lower your credit points.

Credit utilisation ratio – the ratio reflects how much credit card limit you have exhausted. It should not be more than 30%. A high credit utilisation ratio would lower your credit rating.

The impact of adverse credit rating

A poor credit rating will preclude you from accessing a large amount of money. No responsible and ethical lender will ever approbate your application if they are sceptical about your repaying capacity. However, they might be disposed to approve your application for emergency loans for people with bad credit. This is because they come with a small size of money, not more than £1,000, but these loans are required to be discharged in fell one swoop. It could be challenging to keep up with the debt because of high interest rates.

If any lender gives you the nod for a large amount of money, they will charge you very high interest rates. It means the cost of the debt will be too high. As additional fees are charged along with interest, you would most likely find the cost of debt too high.

High interest rates always increase the risk of falling into an abyss of debt. You will end up rolling over the loan. As a result, the amount of debt will keep mushrooming. Once you fall into an ongoing cycle of debt, you will never be able to get out of it. If your credit score is not so good, you will not be able to qualify for better rates for your mortgage. Apart from that, you will have to put down a larger deposit.

Can you borrow money with a bad credit rating?

Yes, you can borrow money with a bad credit rating. There are various types of short-term loans available from direct lenders. They are called payday loans, text loans, bad credit loans, etc. They are all aimed at meeting unexpected expenses, and therefore, they are also known as small emergency loans.

If your credit score is poor, lenders would generally allow you to borrow only a small amount of money. However, you will have to prove your repaying capacity. Sometimes, the application is repudiated even if you need money for emergencies.

If your credit score is within the range of “very poor credit rating,” it will be extremely hard to get approval from a lender. Most lenders do not accept applications from subprime borrowers with too bad credit creating. You should take out a CCJ loan from a direct lender only when you are completely certain about your repaying capacity. These loans carry very high interest rates. There are chances of plunging into debt if you are not careful while borrowing money.

There are a few registered lenders who provide CCJ loans. Make sure that you have carefully researched about the authenticity of the lender. There are some loan sharks. It is possible that you end up borrowing money from unregistered direct lenders. They use unethical ways to lend money and charge exorbitant interest rates to capitalise on your poor financial condition.

Ways to ameliorate your credit rating

Here is how you can ameliorate your adverse credit score:

• You should try to pay off your bills on time. If your budget is weak, you should come up with a new repayment plan.
• Talk to your lender and try to repay more than the minimum payment amount.
• Do not exhaust your credit card limit. Excessive reliance on credit cards for your living expenses is perceived as an incapability to manage money.
• You should also focus on the debt-to-income ratio, even though it does not have a direct impact on your credit score. Keep it as low as possible to demonstrate that you are not always borrowing money.

The final word

An adverse credit score is not a good sign. It will affect your ability to borrow money. Most lenders will restrict you to a large amount of money. Small loans will also be approved at very high interest rates. You should try to keep your credit score stellar to improve your chances of borrowing money at a high interest rate.