What Is Derogatory Credit and How Does It Affect You?
Understand derogatory credit: what it means for your financial future, its impact on your score, and how to improve your credit health.
Credit represents your financial reliability, indicating your ability to manage borrowed money and repay it responsibly. When negative information appears on your credit report, it is termed “derogatory credit.” This signals to potential lenders that you may pose a higher risk, potentially affecting your access to future financial products and services.
Understanding Derogatory Credit
Derogatory credit refers to negative events or behaviors in a borrower’s financial history, showing a failure to meet financial obligations as agreed. This information is reported by creditors to the three major credit bureaus—Equifax, Experian, and TransUnion—and appears on your credit reports. A derogatory mark indicates an account is past due or represents a credit risk, meaning a lender might lose money due to missed payments.
These marks reflect a person’s financial responsibility and can remain on a credit report for several years, influencing decisions made by various entities. While alerts from an issuer about low balances or fraud are distinct, derogatory marks specifically denote instances of financial mismanagement.
Common Types of Derogatory Marks
Many types of derogatory marks can appear on a credit report, each stemming from different financial missteps. Late payments occur when an account is at least 30 days past its due date. The longer a payment remains unpaid, the more significant its negative impact on your credit score.
Collection accounts arise when an unpaid debt is sold or transferred by the original creditor to a collection agency. This indicates that the initial attempts to collect the debt were unsuccessful. A charge-off happens when a creditor deems a debt uncollectible and writes it off as a loss after a prolonged period of non-payment, often 180 days past due. This does not mean the debt is forgiven, and it can still be pursued by collectors.
More severe derogatory marks include bankruptcies, foreclosures, and repossessions. Bankruptcy involves a legal process to discharge or restructure debts and can remain on a report for seven to ten years. Foreclosures occur when a lender reclaims property due to a borrower’s failure to make mortgage payments, while repossessions involve the seizure of collateral, such as a vehicle, due to missed loan payments.
Impact on Your Financial Standing
Derogatory marks significantly lower your credit scores because payment history is the most influential factor in these calculations. A single derogatory mark can reduce a credit score by 100 points or more, making it harder to secure new credit or obtain favorable terms. The severity of the impact depends on the type of mark and your overall credit history; a higher existing score may experience a larger drop.
A lower credit score has several practical implications, including higher interest rates on loans like mortgages, auto loans, and personal loans, increasing the total cost of borrowing. It can also lead to difficulty qualifying for credit cards, with potential consequences like reduced credit limits or account closures. Beyond lending, derogatory marks can affect rental applications, employer reviews for positions requiring financial responsibility, and insurance premiums.
Accessing Your Credit Reports
Federal law provides access to a free copy of your credit report from each of the three major credit bureaus—Equifax, Experian, and TransUnion—on a weekly basis. The official website for obtaining these free reports is AnnualCreditReport.com.
When visiting AnnualCreditReport.com, you will provide personal information to verify your identity and request your reports. Once accessed, carefully review each section for any unfamiliar accounts, incorrect balances, or inaccurate payment dates. Identifying these discrepancies is crucial, as even minor errors can affect your credit standing.
Addressing Derogatory Information
If you discover inaccuracies, such as an account you do not recognize or an incorrect payment status, you have the right to dispute the information with the credit bureaus. This involves contacting the specific credit bureau—Equifax, Experian, or TransUnion—and providing details about the error along with supporting documentation. The credit bureau is required to investigate your dispute within 30 days.
For legitimate debts, paying off collection accounts or charge-offs can help improve your credit standing over time, though the negative mark may remain on your report for up to seven years. Newer credit scoring models may weigh paid collections less negatively. In some cases, you might negotiate with the original creditor or collection agency for a “pay-for-delete” agreement, where they agree to remove the derogatory mark in exchange for payment. Creditors are not obligated to agree to this, and any such agreement should be obtained in writing before payment is made.