Adverse Credit History: The 411 on 109 Million Consumers

What is Adverse Credit History?

An adverse credit history is a record of unpaid or late payments, collections, charge-offs, and other negative financial events that can damage your credit score. According to the Consumer Financial Protection Bureau (CFPB), over 109 million consumers in the United States have adverse credit history on their credit reports.

Consequences of Adverse Credit History

A poor credit history can have serious consequences, including:

• Higher interest rates on loans and credit cards: Lenders view consumers with adverse credit history as a higher risk, so they charge them higher interest rates. According to the Federal Reserve, the average interest rate on a personal loan for borrowers with adverse credit history is 14.9%, compared to 9.3% for borrowers with good credit history.
• Difficulty qualifying for loans and credit cards: Lenders may be reluctant to approve loans and credit cards to consumers with adverse credit history. In 2021, 12% of loan applications were denied due to adverse credit history.
• Lower credit limits: Lenders may limit the credit limits on credit cards issued to consumers with adverse credit history.
• Higher insurance premiums: Some insurance companies use credit scores to determine insurance premiums. Consumers with adverse credit history may pay higher premiums for auto, homeowners, and renters insurance.

Causes of Adverse Credit History

There are many factors that can contribute to adverse credit history, including:

• Missed payments: Missing even one payment can be reported to your credit report, damaging your credit score.
• High balances: Credit utilization, or the amount of credit you use compared to the total amount of credit available, is a major factor in credit scores. Using more than 30% of your available credit can lower your score.
• Debt: Having too much debt relative to your income can also lower your credit score.
• Bankruptcy: Filing for bankruptcy will have a severe impact on your credit score.
• Collections: When you fail to pay a bill, the creditor may turn it over to a collection agency. Collection accounts can remain on your credit report for up to seven years.

Repairing Adverse Credit History

Repairing adverse credit history can take time and effort, but it is possible. Here are some steps you can take to improve your credit score:

• Pay your bills on time: Your payment history is the most important factor in your credit score. Make sure to pay all of your bills on time, every time.
• Reduce your debt: If you have too much debt, work on reducing it. Paying down debt will improve your credit utilization ratio and lower your overall debt-to-income ratio.
• Dispute errors on your credit report: Review your credit report regularly and dispute any errors. Incorrect information can damage your credit score.
• Build positive credit history: If you don't have any credit history, or if your credit history is poor, you can start to build positive credit history by getting a secured credit card or a credit-builder loan.
• Consider credit counseling: If you're struggling to manage your debt, consider seeking professional help from a credit counselor. Credit counselors can help you develop a budget and create a plan to repay your debt.

Resources for Consumers with Adverse Credit History

There are several resources available to help consumers with adverse credit history. Here are a few:

• National Foundation for Credit Counseling: The NFCC is a non-profit organization that provides free credit counseling and debt management services to consumers.
• Credit Karma: Credit Karma is a free website that provides consumers with access to their credit reports and scores. Credit Karma also offers tools and tips for improving credit scores.
• MyFICO: MyFICO is a website that provides consumers with access to their FICO scores. MyFICO also offers tools and resources for improving credit scores.

Conclusion

Adverse credit history can have serious consequences, but it is possible to repair it. By following the steps outlined in this article, you can improve your credit score and access better financial opportunities.