What Is a Derogatory Trade on Your Credit Report?

A derogatory mark is a negative entry on an individual’s credit report, indicating a failure to meet financial obligations as originally agreed upon with a creditor. These marks signal a person’s past credit behavior, highlighting instances where payments were not made on time or accounts went into default.

Understanding Derogatory Marks

A derogatory mark reflects a consumer’s failure to fulfill financial commitments. These marks arise when a creditor reports a serious delinquency or defaulted account to one or more of the three major credit bureaus: Equifax, Experian, and TransUnion. This reporting provides a comprehensive picture of an individual’s creditworthiness, helping assess the risk of extending new credit or services. Derogatory marks signal past financial missteps, making them a significant factor in credit evaluations.

These negative entries are classified as “open” or “closed” based on the account’s status. An open mark might be ongoing late payments on an active credit card, while a closed mark could be a collection account for a written-off debt. Many creditors report to all credit bureaus to ensure a broad record of payment behavior. The presence of these marks indicates a higher financial risk to prospective creditors.

Common Types of Derogatory Marks

Several types of derogatory marks can appear on a credit report, each stemming from different financial missteps.

Late payments are common, occurring when a payment is made 30, 60, 90, or more days past its due date. The impact of a late payment increases with the number of days past due. These entries remain on a credit report for about seven years from the date of the delinquency.

Collection accounts arise when a creditor sells an unpaid debt to a third-party collection agency or assigns it to an internal collection department. This happens after a period of non-payment, signifying a more serious delinquency than a simple late payment. A charge-off occurs when a creditor deems an account uncollectible and writes it off as a loss, often after several months of missed payments. Both collection accounts and charge-offs remain on a credit report for approximately seven years from the date of the original delinquency.

More severe derogatory marks include bankruptcies, which are legal proceedings to resolve overwhelming debt. These can stay on a report for seven to ten years depending on the type (e.g., Chapter 13 for seven years, Chapter 7 for ten years). Foreclosures, resulting from failure to make mortgage payments, and repossessions, where a lender seizes collateral due to non-payment, are also significant derogatory events. These remain on a credit report for seven years from the date of the event.

How Derogatory Marks Affect Credit

Derogatory marks significantly impact an individual’s credit score, such as FICO or VantageScore, by signaling increased risk to lenders. Payment history is a primary factor in credit scoring models, so even a single late payment can cause a notable drop in scores. The more severe the derogatory mark, like a bankruptcy or foreclosure, the more substantial and long-lasting its negative effect on credit scores.

A lower credit score from derogatory marks can lead to several financial repercussions. Lenders may view the individual as a higher credit risk, resulting in higher interest rates on loans, less favorable terms, or even denial for new credit. This can affect eligibility for various financial products, including mortgages, auto loans, and credit cards. Beyond lending, derogatory marks can also influence housing rentals, insurance premiums, and employment screenings, as some employers review credit reports as part of their background checks.

Addressing Derogatory Marks

Individuals dealing with derogatory marks can take several steps to manage their credit profile. Regularly reviewing credit reports from the three major bureaus—Equifax, Experian, and TransUnion—is a first step to ensure accuracy. Consumers are entitled to free annual credit reports, and checking them allows for identification of any incorrect or outdated information.

If an inaccuracy is found, disputing the error with the relevant credit bureau is important. This process involves submitting a dispute with supporting documentation, such as proof of payment or evidence of identity theft. The credit bureau is required to investigate the claim, and if the mark is confirmed as an error, it will be removed.

For valid derogatory marks, options are more limited but still exist. Paying off collection accounts can change their status to “paid” on the report, which, while not removing the mark, may be viewed more favorably by some lenders than an unpaid status. Derogatory marks will eventually fall off a credit report after a specified period, seven years, or ten years for Chapter 7 bankruptcies. Consistently building positive credit by making all payments on time and managing existing credit responsibly can gradually improve credit scores over time, mitigating the impact of past derogatory marks.