What is an adverse credit history?

Bad credit will not prevent you from qualifying for most federal student loans. But if you’re looking for a private student loan or a Federal Direct PLUS loan, your credit reports will be assessed for late payments and bankruptcies, also known as adverse credit history.

An unfavorable credit history could make it difficult, if not impossible, to obtain certain student loans. As such, it’s important to know if you have a bad credit history, especially since there are steps you can take to improve your credit if necessary.

Take away key

An unfavorable credit history is a measure of your liability for debt repayment. Having a bad credit history could make it harder to get a new student loan.

What is an adverse credit history?

An adverse credit history means that there is derogatory information on at least one of your credit reports with Equifax, TransUnion or Experian. The US Department of Education will consider you to have an adverse credit history if you have more than $2,085 in outstanding debt (at least 90 days old) or if that debt has been collected within the last two years. One or more combined accounts can contribute to this total.

Additionally, if you’ve had any of the following problems within the last five years, you may have an unfavorable credit history:

  • Fault.
  • Foreclosure.
  • Repossession.
  • Debts discharged in the event of bankruptcy.
  • Tax privilege.
  • Payday entry.
  • Write-off of federal student loans.

How do you get an adverse credit history?

If you fall behind on your payments on a credit obligation and are in default, the status of default may appear on your credit report, contributing to an adverse credit history.

At the same time, sometimes an unfavorable credit history can arise without your fault. Credit report errors happen from time to time, so it’s good practice to check your credit reports regularly. If an error or fraud appears on your credit report and causes you to have a derogatory credit history, you can take action. Federal law allows you to dispute the error with the appropriate credit reporting agency, and an investigation into the accuracy of the item must take place.

How does a bad credit history affect student loans?

Although Federal Student Loans do not require a minimum credit score, Direct PLUS Loans check for adverse credit history and may deny your application if you have one. Negative marks on your credit report (and the damage to credit rating that often goes with it) could also make it harder or more expensive to get a private student loan.

Either way, you’ll still be able to get a loan if you add a co-signer or endorser who doesn’t have a bad credit history. The process is quite simple for private student loans, but for Direct PLUS loans you will need to go through the extra step of PLUS Credit Counseling. If you believe there are extenuating circumstances or inaccuracies that led to your unfavorable credit history, you can also appeal the credit decision and go through PLUS Credit Counseling without adding an endorser.

How to improve your credit score

Working to improve your credit can benefit you in many ways, especially if you need financing like a student loan. Rebuilding damaged credit can take time, but it’s possible if you follow a few tips:

  • Review your credit reports. You can get a free credit report from all three major credit bureaus once every 12 months at AnnualCreditReport.com. During the pandemic, you can use the same website to access the weekly credit report for free.
  • Dispute credit errors. If you find errors on your credit report, the Fair Credit Reporting Act (FCRA) gives you the right to dispute them.
  • Pay off credit card balances. Having high credit card balances relative to your credit limits (also known as high credit utilization) can be bad for your credit score. But as you pay down your credit card debt, you may be able to improve your credit score and save money on interest charges.
  • Avoid late payments. Late payments are one of the fastest ways to hurt your credit score. Therefore, breaking the habit of late payments is essential if you want to achieve and maintain good credit.
  • Consider settling outstanding debts. Paying or settling overdue debts may or may not have a positive impact on your credit score because settling the debt or even paying it in full does not erase the fact that the negative payment history has occurred. But even if settling derogatory debts doesn’t improve your credit score, it could put you in a better position to qualify for certain types of financing, including student loans.

The bottom line

If you have a bad credit history when applying for a Private Loan or Direct PLUS, you may run into trouble. However, you may still qualify if you add a cosigner to your loan, and you can take steps to improve your credit going forward.

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