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What is an adverse credit history?

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Bad credit won’t prevent you from qualifying for most federal student loans. But if you’re seeking a private student loan or a federal Direct PLUS Loan, your credit reports will be evaluated for late payments and bankruptcies, also known as an adverse credit history.

An adverse credit history could make it difficult or even impossible to secure certain student loans. As such, knowing whether you have an adverse credit history is important, especially since there are moves you can make to improve your credit if needed.

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Key takeaway
An adverse credit history is a measure of how responsible you’ve been with debt payments. Having an adverse credit history could make it harder to get a new student loan.

What is 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 U.S. Department of Education will consider you to have an adverse credit history if you have more than $2,085 in past-due debt (by at least 90 days), or if that debt has been in collections in the past two years. One or multiple accounts combined can contribute to this total.

Furthermore, if you have experienced any of the following issues in the last five years, you may have an adverse credit history:

  • Default.
  • Foreclosure.
  • Repossession.
  • Debts discharged in bankruptcy.
  • Tax lien.
  • Wage garnishment.
  • 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 default on the debt, the default status may show up on your credit report, contributing to an adverse credit history.

At the same time, an adverse credit history can sometimes happen through no fault of your own. Credit reporting errors do occur from time to time, so it’s a good practice to regularly check your credit reports. If a mistake or fraud shows up on your credit report and causes you to have a derogatory credit history, you can take action. Federal law empowers you to dispute the error with the appropriate credit reporting agency, and an investigation into the accuracy of the item must occur.

How does an adverse credit history affect student loans?

While federal student loans don’t require a minimum credit score, Direct PLUS Loans do check for an adverse credit history and may deny your application if you have one. Negative marks on your credit report (and the credit score damage that often goes hand in hand) could also make it more difficult or more expensive to qualify for a private student loan.

In both cases, you may still be able to get a loan if you add a co-signer or endorser who does not have an adverse credit history. The process is fairly simple for private student loans, but for Direct PLUS Loans you’ll need to go through the additional step of PLUS Credit Counseling. If you believe that there are extenuating circumstances or inaccuracies that led to your adverse 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 to obtain financing like a student loan. Rebuilding damaged credit can take time, but it is 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 for free weekly credit report access.
  • Dispute credit errors. If you find mistakes on your credit report, the Fair Credit Reporting Act (FCRA) gives you the right to dispute them.
  • Pay down credit card balances. Having high credit card balances as they relate 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 fees.
  • Avoid late payments. Late payments are one of the fastest ways to damage your credit score. Therefore, it’s essential to break the late payment habit if you want to earn a good credit score and keep it.
  • Consider settling defaulted debts. Paying or settling past-due debts may or may not have a positive impact on your credit score, since debt settlement or even paying in full doesn’t erase the fact that the negative payment history occurred. But even if settling derogatory debts doesn’t improve your credit score, it might still put you in a better position to qualify for certain types of financing, including student loans.

The bottom line

If you have an adverse credit history when you apply for a private or Direct PLUS Loan, you might run into some issues. However, you may still qualify if you add a co-signer to your loan, and you can take steps to improve your credit for the future.

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Written by
Michelle Black
Contributing writer
Michelle Lambright Black is a credit expert with over 19 years of experience, a freelance writer and a certified credit expert witness. In addition to writing for Bankrate, Michelle's work is featured with numerous publications including FICO, Experian, Forbes, U.S. News & World Report and Reader’s Digest, among others.
Edited by
Student loans editor