What Does a Derogatory Trade Mean on a Credit Report?
Understand what a derogatory trade means on your credit report, how it affects your financial standing, and steps to manage its impact.
A derogatory trade refers to a negative entry on an individual’s credit report. These marks indicate a failure to meet financial obligations. They signal to potential creditors that a consumer may pose a higher risk of not repaying borrowed funds. The presence of derogatory trades significantly impacts an individual’s creditworthiness, making it challenging to access favorable financial products.
Common Types of Derogatory Marks
One of the most common derogatory marks is a late payment. This occurs when a consumer fails to make a scheduled payment on a credit account by its due date. Payments reported 30, 60, 90, or more days past due can appear on a credit report. Collection accounts arise when an original creditor charges off a debt and sells it to a third-party collection agency due to non-payment.
A charge-off occurs when a creditor determines that a debt is unlikely to be collected and writes it off as a loss. The consumer still legally owes the money, and the account often goes to collections. Bankruptcies, filed under Chapter 7 or Chapter 13, are legal proceedings that allow individuals to eliminate or reorganize their debts under court protection. These are severe derogatory marks, indicating an inability to manage financial obligations.
Foreclosures happen when a homeowner defaults on their mortgage payments, leading the lender to repossess and sell the property. Repossessions occur when a lender takes back an asset, such as a vehicle, because the borrower failed to make payments. Civil judgments, resulting from court orders to pay a debt, can impact a consumer’s financial standing and ability to secure credit.
How Derogatory Marks Affect Credit
Derogatory marks significantly impair a consumer’s credit score. Payment history is the most influential factor in credit scoring models. Each negative entry signals a higher risk to lenders, leading to a substantial reduction in credit scores. The more severe the derogatory mark, such as a bankruptcy or foreclosure, the greater the negative impact. Multiple instances of late payments or collections further compound this effect.
The practical consequences of a lower credit score due to derogatory marks are far-reaching. Consumers may find it difficult to obtain new loans, such as mortgages, auto loans, or personal loans, or to qualify for new credit cards. When approved for credit, individuals with derogatory marks face much higher interest rates, increasing the total cost of borrowing.
A poor credit history can create challenges in other areas of life. Landlords often check credit reports, making it harder to rent an apartment or home. Some employers may also review credit reports, potentially affecting job prospects. Insurance providers may use credit-based insurance scores to determine premiums, leading to higher costs for auto or homeowner’s insurance.
Duration of Derogatory Marks
Most derogatory marks remain on a consumer’s credit report for seven years from the date of the original delinquency. This includes late payments, collection accounts, and charge-offs. A late payment reported for an account will fall off the report seven years after the date the payment was first missed, not from the date the account was closed or paid. The seven-year timeframe is a standard established by the Fair Credit Reporting Act (FCRA).
Bankruptcies can remain on a credit report for a longer duration. A Chapter 7 bankruptcy can stay on a credit report for up to ten years from the filing date. A Chapter 13 bankruptcy remains for seven years from the filing date. Foreclosures and repossessions are reported for seven years from the date of the first missed payment.
Steps to Address Derogatory Marks
Begin by regularly reviewing credit reports from all three major credit bureaus: Equifax, Experian, and TransUnion. Consumers are entitled to a free report from each bureau annually, which allows for examination of reported accounts and identification of any inaccuracies.
If an individual discovers an error, such as an incorrect late payment, they can dispute the inaccuracy directly with the credit bureau. The dispute process involves submitting documentation to support the claim, and the bureau is required to investigate the disputed item within 30 days. Successful disputes can lead to the removal of derogatory marks, which may improve credit scores.
For legitimate derogatory marks, paying off the debt is helpful. While the derogatory mark itself may remain on the report for seven years, a “paid” status often looks more favorable to lenders than an “unpaid” one. For isolated late payments, a consumer can send a “goodwill letter” to the original creditor, requesting removal of the late payment entry if they have a strong payment history. Additionally, building new positive credit history through secured credit cards or credit-builder loans can help offset the negative impact of older derogatory marks over time.