What Does Derogatory Mean on a Credit Report?
Learn what derogatory marks mean for your credit report. Understand their impact, how long they last, and steps to improve your credit health.
A credit report serves as a detailed record of an individual’s borrowing and payment history, compiling financial activities over time. This document contains both favorable information, such as consistent on-time payments, and unfavorable entries. Unfavorable entries, specifically, are known as “derogatory marks,” which indicate past financial missteps.
What Are Derogatory Marks?
Derogatory marks signify a failure to meet financial obligations. These negative entries can arise from various situations, each reflecting a different type of financial challenge.
Common derogatory marks include late payments, which occur when a payment is made 30, 60, or even 90 or more days past its due date. Collection accounts emerge when a debt, such as an unpaid medical bill or credit card balance, is sold to a third-party collection agency because the original creditor deemed it uncollectible. A charge-off happens when a creditor determines a debt is unlikely to be collected and writes it off as a loss, though the debt remains owed.
More severe derogatory marks include bankruptcies, which are legal proceedings for individuals or businesses unable to repay their outstanding debts. Foreclosures involve a lender repossessing a property due to the homeowner’s inability to make mortgage payments, while repossessions occur when a lender takes back an asset, like a vehicle, because of defaulted loan payments. Civil judgments and tax liens, while less common on modern credit reports due to policy changes, historically appeared when a court ordered a debtor to pay a creditor or when the government placed a claim on assets due to unpaid taxes.
Impact on Your Credit Score
Derogatory marks significantly reduce a credit score, reflecting negatively on an individual’s creditworthiness. The presence of these marks, especially recent ones, can cause a substantial drop in a credit score.
The severity and recency of a derogatory mark also play a role in its impact. A bankruptcy, for instance, has a more profound negative effect than a single 30-day late payment. Furthermore, a derogatory mark that occurred last month will have a much stronger negative influence than one that happened several years ago. Lenders view recent financial distress as a greater risk indicator.
A lower credit score resulting from derogatory marks can lead to several practical consequences. Individuals may face higher interest rates on new loans, such as mortgages or auto loans, increasing the total cost of borrowing. Obtaining new credit, including credit cards, can become challenging, and some landlords may deny rental applications based on poor credit. Additionally, a low credit score can sometimes affect insurance premiums or even employment background checks in certain industries.
Duration of Derogatory Marks
Most derogatory marks remain on a credit report for up to seven years from the date of the original delinquency. This timeframe applies to common entries such as late payments, collection accounts, charge-offs, and repossessions.
Bankruptcies have specific reporting periods depending on the type filed. A Chapter 13 bankruptcy, which involves a repayment plan, remains on a credit report for up to seven years from the filing date. A Chapter 7 bankruptcy, which involves liquidation of assets, can stay on a credit report for up to ten years from the filing date.
Historically, some unpaid tax liens could remain indefinitely, but current practices lead to their removal after seven years, similar to other negative items. Paid tax liens and civil judgments, if reported, are removed seven years from the date they were paid or released. While a derogatory mark may be removed from a credit report after its reporting period, the underlying debt itself may still be legally owed and collectible, depending on state statutes of limitations for debt collection.
Addressing Derogatory Marks
Regularly reviewing your credit report is a first step in managing derogatory marks. Consumers can obtain a free copy of their credit report annually from each of the three major credit bureaus through AnnualCreditReport.com. This helps individuals to identify any derogatory marks and ensure the information is accurate.
Upon review, if an inaccuracy is identified, such as an incorrect date, amount, or an account that does not belong to you, it can be disputed directly with the credit bureaus. This process involves submitting a formal dispute with supporting documentation to Equifax, Experian, or TransUnion. The credit bureau then investigates the claim with the information furnisher, and if the information is found to be inaccurate or unverifiable, it must be removed.
For derogatory marks that are accurate and cannot be disputed, other strategies can help improve your credit standing over time. Paying off a collection account or charge-off, while not removing the entry, can update its status to “paid,” which is viewed more favorably by lenders. This indicates that the debt has been resolved, even if it was initially delinquent.
Building a consistent pattern of positive credit behavior is important. This includes making all current and future payments on time, keeping credit utilization low, and responsibly managing existing credit accounts. Over time, a history of timely payments and responsible credit use will help to offset the negative impact of older derogatory marks, gradually improving your credit score.