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The term “derogatory” implies that something is negative. It is an expression that detracts from an otherwise high opinion or good character.
On a consumer’s credit report, a derogatory entry has an adverse effect on a credit score. Prospective lenders perceive derogatory accounts as “red flags.”
What Does Derogatory Mean?
The three primary consumer credit reporting bureaus are Equifax, Experian, and TransUnion. According to Experian, “derogatory” is not a term used specifically in their credit history reports.
Experian acknowledged that individual lenders might have slightly different definitions for the term. But in a general sense, derogatory implies that a credit account is delinquent (past due) by over 30 days.
Derogatory entries have a large negative impact on consumer credit scores and decisions among lenders. Lenders recognize that a consumer’s past credit use might indicate future outcomes.
With TransUnion, the use of the term, “derogatory,” represents any credit report information that is negative.
FICO and VantageScore are the two primary models used in calculating consumer credit scores. VantageScore explains that derogatory credit entries represent a sign of mismanaged debt.
They also describe derogatory events as damaging and capable of harming credit scores for “extended periods.”
On credit reports, derogatory entries may appear as either open or closed depending on their current status.
What Are the Different Types of Derogatory Marks?
Derogatory credit report entries may appear within the history of your consumer credit reports in various types.
Late payments will usually appear on your consumer credit reports when they reach 30 days or more past due. Keep in mind that making only a partial payment will generally result in a late payment entry.
Equifax points out that some lenders might not report late payments to credit bureaus until they reach 60 days past due. You should expect lenders and credit card companies to automatically charge late fees as well.
A charge-off entry may appear if a lender “writes-off” a debt as a loss and closes the credit account. In most cases, charge-offs occur after accounts reach 180 days past due.
After a charge-off by the original creditor, the debt is typically sold to a third-party collection agency.
Another derogatory entry is a repossession, most commonly associated with car (auto) loans. Here, the vehicle represents collateral securing the loan. If you fail to make timely payments, the lender will legally repossess the car.
A repossession is a seizure of the asset that may occur abruptly and without warning. Yet, a borrower who feels hopelessly unable to make the car payment might voluntarily surrender a vehicle.
A foreclosure refers to a default involving a home mortgage loan. In a home mortgage foreclosure, the lender will retake possession of the home after several months of missed payments.
Bankruptcy is a process filed through a federal court by consumers who find themselves insolvent and unable to pay their debts. Bankruptcies either involve liquidating all assets (Chapter 7) or entering a court-approved partial repayment arrangement (Chapter 13).
Until 2018, civil judgments and tax liens also appeared as derogatory credit report entries.
“Hard” credit inquiries indicate that you have applied for a new credit account. Here, a potential lender might access and review your credit history. Although hard inquiries may result in a small, temporary credit score reduction, they are not deemed as derogatory.
How Does It Affect My Credit?
Derogatory credit marks are not all created equal. For example, a charged-off collection account likely has a more adverse impact than a single late payment.
FICO Score Calculation
- Payment History: 35%
- Amounts Owed: 30%
- Length of Credit History: 15%
- New Credit Accounts and Inquiries: 10%
- Credit Mix: 10%
VantageScore Model 4.0
- Payment History: 41%
- Credit Utilization: 20%
- Age of Credit Accounts / Credit Mix: 20%
- New Credit Accounts: 11%
- Balances: 6%
- Available Credit: 2%
Derogatory credit entries remain on consumer credit reports for seven years. While a Chapter 13 bankruptcy remains on your credit report for seven years, a Chapter 7 bankruptcy appears for 10 years.
Consumers with derogatory entries usually face challenges in obtaining approval for new credit. Some lenders might still extend credit in these cases; yet, will impose higher interest rates or fees.
Credit scoring models generally consider the “big picture” and are difficult to predict. For example, a single derogatory entry often has a larger impact on your credit score if you have good or excellent credit.
Chase provided some general expectations regarding the impact of certain derogatory entries:
- Late payments may reduce your credit score by 100 or more points
- Charge-offs, whether paid off or not, remain for 7 years. Yet, an unpaid charge-off usually has a greater negative impact than those paid.
- Foreclosures and bankruptcies have devastating results–often lowering credit scores by 100+ points.
- Repossessions are often unpredictable and reduce scores from between 50 to 150 points.
How to Remove Derogatory Items From Your Credit Report
Derogatory entries containing information reported completely and accurately are not removable. Expect these negative entries to remain for seven years. Lenders rely on credit report data for making decisions; thus, ensuring the integrity of the information is important.
Consumers should obtain a copy of their credit report each year and review the details. Be sure to read your credit report closely. Entries of any kind containing erroneous information are removable.
You may file a dispute about any potentially inaccurate entries online through all three credit bureau websites. Contacting a lender directly about a disputed entry is also possible.
Although positive outcomes are less likely, you may write a goodwill removal letter. Here, you compose a letter explaining the circumstances that led to the failure to pay. Perhaps you lost a job or endured a serious illness.
If the letter is accepted then the lender may remove the entry.
While derogatory entries are unremovable, consumers still have ways of improving their credit. Although many credit repair companies promote their services, consumers can take their own actions.
Any do-it-yourself credit repair strategy should begin with managing your payment history. As the largest single factor influencing your credit score, making all payments on time is vital.
Pay off existing debts still in collections. Remember the importance of negotiating. Many third-party collection agencies will consider “pay for delete” arrangements. And make sure you get these arrangements in writing.
Pay down existing credit card balances. This helps improve your credit utilization rate. A good utilization rate equates to less than 30%; thus, an account with a $1,000 limit should remain below $300.
Consider other options for improving your credit. Two common examples include credit-builder loans and secured credit cards. Over time, a solid credit-building plan will increasingly offset your aging derogatory entries.
Can a Derogatory Mark Be Removed?
Accurate, legitimate credit report entries are not eligible for removal. Lenders and consumer advocates recognize the importance of protecting credit report data integrity.
Consumers are eligible for a free copy of their credit report each year. Always dispute any data in your inaccurate credit report. All three credit bureaus now have website applications that make it simple to file a dispute.
When filing a dispute, always include any data supporting your assertion.
Should I Pay Derogatory Accounts?
Yes. Paying off outstanding debts should improve your credit score. According to Experian, some newer credit scoring models now exclude paid-off collection accounts.
Keep in mind that many older debts are in collections. Third-party collection agencies are often willing to negotiate for a reduced settlement amount.
Except for Chapter 7 bankruptcies, derogatory credit entries drop off in seven years. Negative accounts approaching the seven-year limit might be best left untouched.
This is particularly important if you are unable to pay off the collection in full. Making a single partial payment on an old credit account may “re-age” the account; thus, restarting the seven-year period.
How Long Can a Derogatory Remark Stay on a Credit Report?
Derogatory credit entries are negative accounts that are visible on your credit report. Examples include late payments past due by 30 days, repossessions, and foreclosures.
Except for Chapter 7 bankruptcies that stay for 10 years, other derogatory accounts remain for only seven years. During the seven-year period, derogatory entries hinder your credit score to some extent.
Keep in mind that derogatory entries are not erroneously or inaccurately reported entries. Always dispute accounts containing errors, as they are often removable in 30 days.
What’s Worse, Delinquent or Derogatory?
Most lenders report consumer credit account information to one or more of the three major credit bureaus.
Accounts deemed as delinquent entries and derogatory entries are both negative. The term “derogatory” does not actually appear on Experian credit bureau reports.
Both terms are generally used when describing a late or missed payment on a credit account. According to Experian, when those in the credit industry use both terms, they are distinct.
In this context, an account that is 30 or more days past due is delinquent. An account that is 180 days past due is derogatory.
Thus, a derogatory account is one of greater severity. In most cases, a past due account that reaches 180 days is “charged-off” by the lender.
Anthony Amodeo is a regular finance writer in both business-to-business and business-to-consumer industries. Particular areas of focus include personal finance, small business, real estate, and more. He is a graduate of Kent State University. His credit scores are top tier.