What is Bad Credit?

What is Bad Credit?

Before you start deciding how you’re going to go about getting your bad credit mortgage, it’s best to fully understand what bad credit is and how adverse credit works. Click here for our introduction on bad credit mortgages, or read on for some background into why you may have a bad credit score.

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What do we mean by ‘bad credit’ mortgages?

‘Bad credit’ is a phrase used by many organisations which refers to people whose credit score is defined by the credit reference agencies (like Experian, Equifax etc.) as ‘poor’ or ‘very poor’. Each credit reference agency uses their own scoring systems so there’s no specific score which is universally considered ‘poor’ or ‘very poor’. You might have heard other phrases like ‘sub-prime’ or ‘adverse’ used to describe the same thing.

When you’re applying for a mortgage your lender will need to check your credit history to assess the likelihood that they’ll get their investment back. Your credit history will show the lender how reliable you’ve been with previous forms of credit, like a credit card or a mobile phone bill.

If you think you might need a bad credit mortgage, don’t worry. There are lots of lenders out there that specialise in lending to people in your situation. And if your credit score isn’t too good, don’t worry too much either. Lenders assess a wide range of factors, only one of which is your credit history.

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What might give me a bad credit score?

There are a many things that can give you a bad credit score. There are no set rules on how each of these will affect your credit score as it depends on your particular circumstances and on each credit reference agency’s assessment process.

Here are the key reasons people might have a bad credit score:

  • No credit history (i.e. you’ve never taken out a loan or a credit card)
  • Missed mortgage payments
  • Late payments on bills
  • Defaults on bills and other forms of credit
  • County Court Judgements (CCJs)
  • Individual Voluntary Arrangements (IVAs)
  • Payday loans
  • Debt management schemes
  • Bankruptcy
  • Repossessions

Speaking generally, the more credit issues you’ve had, the trickier it’ll be to get a bad credit mortgage. It certainly doesn’t mean that you won’t get one though. With multiple credit issues you might also need to pay a slightly higher deposit and interest rates than someone with one or zero credit issues.

There are also other related factors that might affect your application for a bad credit mortgage. Lenders will take into account how recently you had any credit issues – the more recent the issue(s), the more of a red flag that is that you might have some challenges making payments. Each lender has their own specific date criteria when assessing bad credit mortgage applications, so it helps to know what your lender will want before you apply.

After six years, credit issues are wiped from your credit file. This is really useful to know as some people might hold back from ever applying for a bad credit mortgage because they didn’t know this. It’s also worth us reiterating that even if you had a credit issue less than six years ago but more than, say, three years ago, don’t assume you won’t get your mortgage. As we said, most lenders are more interested in any recent credit issues – there are no universal rules on this but if your credit issue is more than two years old, many lenders would deem that as far enough in the past to discount.

The size of the issues you had is also important. While lenders often won’t say how much weight they put onto different types of credit issue, they tend to take more seriously the issues that have a higher monetary value. So if you’ve missed some mobile phone bill payments, this isn’t good but if that’s all you’ve missed most lenders would dismiss that. If you’ve recently missed repayments on a big loan, that would be seen as more serious and would probably carry more weight in the lenders’ assessments.

The most severe credit issues that would have the biggest impact on your application would be bankruptcy, repossession or IVAs. As with all bad credit mortgages, having any of these issues doesn’t automatically rule you out of being able to get a mortgage. But these issues would make it harder and would tend to mean you’d need to pay a large deposit and higher interest rates.

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Check your credit score

If you want to get a mortgage, it’s really important to stay on top of your credit score. It’s important to do this at any time but even more so if you’re thinking of getting a mortgage. It’s often free to check your credit score and there are some providers who’ll let you check your score without leaving a mark on your credit file (known as a ‘soft footprint’). A lot of people used to be put off from even checking their credit score because they thought checking it would negatively affect their actual score. This is largely untrue nowadays.

Get in touch with us using the form below for more insight into what bad credit is and how it can affect your chances of getting a mortgage.