What Is Derogatory Information on a Credit Report?
Understand what negative items on your credit report mean for your financial future and how to address them.
Derogatory information on a credit report indicates a borrower’s failure to meet financial obligations. These marks signal to potential lenders that a borrower may pose a higher risk, impacting access to credit and other essential services.
Understanding Derogatory Information
Derogatory information refers to negative entries on a credit report that signify a borrower has not fulfilled their credit agreements. Creditors report these marks to credit bureaus, making them part of an individual’s credit history. Common types of derogatory marks include late payments. The longer a payment is delayed, the more severe its impact on a credit report.
Collections represent another form of derogatory information, occurring when a debt remains unpaid for an extended period, leading the original creditor to sell or assign the debt to a collection agency. A charge-off happens when a creditor determines a debt is unlikely to be collected and writes it off as a loss, closing the account to further charges. More severe derogatory marks include bankruptcies, which are legal proceedings for debt relief, and foreclosures, where a lender reclaims property due to missed mortgage payments. Repossessions involve a lender seizing an asset, such as a vehicle, because of missed loan payments.
Impact on Your Credit
Derogatory information significantly harms an individual’s credit standing. These negative marks directly contribute to lower credit scores because payment history is a major factor in their calculation. The more severe the derogatory mark, or the more recent it is, the greater its negative effect on credit scores.
The consequences of derogatory marks extend beyond just a numerical score. They can make it considerably more challenging to secure new loans, including mortgages, auto loans, and personal loans, or to obtain new credit cards. Even if approved, individuals with derogatory marks may face less favorable terms, such as higher interest rates or larger down payments. Beyond lending, a poor credit history can also influence rental applications, insurance rates, and even certain employment background checks, particularly for positions requiring financial responsibility.
Timeframes for Reporting
The period for which derogatory information remains on a credit report is generally governed by federal law. Most negative items, including late payments, collections, charge-offs, foreclosures, and repossessions, can remain on a credit report for approximately seven years. For late payments, this seven-year period typically begins from the date of the original delinquency. Collections generally stay on reports for seven years plus 180 days from the original delinquency date.
Bankruptcies have different reporting timeframes depending on the type filed. A Chapter 13 bankruptcy typically remains on a credit report for seven years from the filing date, while a Chapter 7 bankruptcy can stay for up to 10 years from the filing date.
Steps to Address Derogatory Information
If a derogatory mark is inaccurate or the result of fraud, consumers have the right to dispute it with the credit bureaus. The dispute process typically involves submitting a written explanation of the error, along with any supporting documentation, to the credit bureau. Credit bureaus are generally required to investigate the dispute within 30 days and correct or remove information found to be inaccurate or unverifiable.
For accurate derogatory marks, the approach shifts to managing their impact and rebuilding credit. Paying off collection accounts, while not removing them from the report before their statutory seven-year period, can improve credit standing. Consumers might also attempt to negotiate with collection agencies for a “pay-for-delete” arrangement, though this is not commonly successful and is not a guaranteed outcome. Another strategy involves sending a “goodwill letter” to the original creditor, particularly for isolated late payments, explaining the reason for the missed payment and requesting its removal. This is most effective for accounts with an otherwise strong payment history, and creditors are not obligated to grant such requests.