The word “derogatory” can mean a few negative things when referring to your finances, which includes negative marks on your credit history.
Knowing more details about what a derogatory mark on your credit means and how it can affect other areas of your life can help you decide which strategy will be most helpful in improving your financial situation. For example, keeping a trade line, or a financial record, of your spending can help identify habits you may want to eliminate or work on.
Continue reading to learn more about what derogatory means related to credit reports and credit scores!
Different Types of Derogatory Marks on Your Credit Reports and Credit Scores
In general, the term derogatory related to credit will reference derogatory marks, negative actions that appear on your credit reports and may hurt your credit scores.
Some examples of different derogatory marks that can show up on your credit report, depending on how you handle your loans and other financial products, are:
- Making late payments
- Defaulting on a loan
- Having a collections account created in your name
- Declaring bankruptcy
- Going through a property foreclosure
Any time you miss a payment and have to pay it after the due date (which will mean a late charge), it will be reported to the three credit bureaus. That behavior will then show up on your credit report. Your payment history is the most significant factor impacting your credit score, so even one late payment may have a considerable impact.
Loan default occurs when you do not repay your loan based on the loan agreement. If you default on any financial product, it will hurt your credit score and be noted on your credit report.
A Collections Account
A collections account occurs when a debt collector or a debt collection agency takes over a credit account. This usually happens when you have several missed payments and default on the loan/debt/line of credit. Those actions leading up to a collections account will hurt your credit score, but the collection account being there may not. However, a collections account on your credit report will not look good for prospective lenders.
Bankruptcy will be a substantial derogatory mark on your credit, and can bring your credit score down several points. Furthermore, bankruptcy may act as a major red flag if a prospective lender sees it.
Foreclosures occur when you cannot repay a mortgage, and your lender takes your home. When this does happen, it will show up on your credit report and bring down your credit score. Unfortunately, foreclosure can look just as bad as something like bankruptcy.
What shows up on your credit reports can change, and you may have noticed recently that medical debt, tax liens, and civil judgments, which once used to be a part of your credit, are no longer there. And so, it is important to stay up to date on that information.
It is also crucial to keep track of your credit history, which you can do by checking your credit report from each credit bureau. You are entitled to a free report from all three consumer reporting agencies at least once a year. Knowing how to read your credit reports and doing so regularly will provide you with financial protection, as you’ll be able to check for identity theft and/or any mistakes or inconsistencies.
Do Derogatory Marks Go Away?
Derogatory marks do go away eventually; but how long it will stay on your record depends on the type of action listed. For example, you may be wondering how long does a repo stay on your credit? Well, for late payments, collection accounts (once they are paid off), foreclosure, repossession, chapter 17, and loan default, the average time they may stay on your credit reports is seven years. In comparison, chapter 13 bankruptcy may remain on your credit reports for up to 10 years.
How a Poor Credit Score Impacts Your Finances
Having a ton of derogatory marks and negative items will bring down your credit score. A negative score can make getting financial products and services more difficult and impact other aspects of your life. Because with a low score, to lenders, you are a credit risk.
Here are some ways that adverse credit can affect you:
It Can Be Difficult To Get Funding From a Loan or Line of Credit
A poor credit score can make it hard to get a loan or any type of credit. This can make it difficult if you face an emergency or just need to borrow some extra cash to spend on yourself. Most loan options will require good credit, although federal student loans and private student loans do tend to provide a little more wiggle room, especially with a cosigner. There are also bad credit loans out there, but they will come with high-interest rates, smaller loan amounts, and strict, predetermined repayment lengths. With good credit, you’ll usually pay less and get more flexibility.
It Can Be Hard to Finance Big Ticket Items
When purchasing a car, a home, or other large ticket items, most people have to finance it. Most cars cost at least a couple thousand dollars, while a home can cost several thousand. Things like furniture and art can also cost a lot! Getting a loan to finance these things may be difficult without a good credit history.
Bad Credit Can Make It Difficult To Secure Housing
Credit checks have become pretty standard with most rentals. And in many cases, with a bad credit score, you may not qualify for the place you want to rent. When buying a house, your credit score will be an important factor for approval. Without a good credit score, it will be tough to secure a mortgage loan.
Poor Credit Can Mean Losing Out on a Job
Having poor credit may mean losing out on a job. In some states, prospective employers are allowed to check a job applicant’s credit score. If another applicant has better credit than you and both have the same qualifications, it may mean the other applicant gets the job.
Different Ways To Improve Your Credit Score Even if It Has Derogatory Marks
If you have derogatory marks in your financial history, which includes negative credit history, you will have to wait for them to go away. If they are mistakes, then you can definitely correct them and remove them from your credit reports. On the other hand, if they are here to stay, you can take steps to help improve your credit.
To make sure your credit reports stay accurate, it’s a good idea to check your report regularly. It’s also important for young people to remember that their credit score matters! According to Lexington Law, about 38% of adults ages 18 to 24 have said that they never check their credit scores.1
Some strategies that can work well to help rebuild credit are:
- Making all your due payments on time
- Focusing on paying off existing debts
- Limiting new credit applications and inquiries
- Diversifying your credit portfolio
Make On-Time Payments With Credit Card Accounts
One of the most effective ways to improve your credit is to make on-time payments with your bills and other financial obligations. Your payment history is the most significant factor impacting your score, and on-time payments will make a substantial difference over time. If you have trouble keeping track of due dates, setting up automatic payments can be an easy way to take care of that.
Pay Off Debt
Keeping your debt under 30% of your available credit may help your overall score. Anything under that is great, too, as it can free up your income. And so, paying off your debt can be beneficial to your credit. Paying off revolving accounts like credit cards will be extra helpful as that will increase your available credit while at the same time decreasing the amount of debt you have. If you are unsure where to start, there are all kinds of repayment strategies out there that can help you pay off debt faster. Whether you have various small debts or one large one, you’ll likely find a solution that works.
Below is more info on some debt repayment strategies you may find helpful:
|Debt Avalanche||Focuses on paying off debts with the highest interest rates first, then moving to the next highest.||Saves more on interest; faster payoff for high-interest debts.||May take time to see progress; less motivational.|
|Debt Snowball||Focuses on paying off the smallest debts first, then moving on to the next smallest.||Quick wins; highly motivational.||May pay more in interest.|
|Cash Stuffing||Allocating cash into different envelopes for specific debts, only spending what’s in each envelope.||Helps with budgeting; clear visual spending.||May be challenging to manage; less flexibility.|
|Balance Transfer||Transferring high-interest debts to a card with lower interest, often with an introductory rate.||Can save on interest; simplifies payments.||Fees; introductory rates may expire.|
|Debt Consolidation||Combining multiple debts into a single loan with a fixed interest rate.||Simplifies payments; may lower interest rate.||Fees; may extend repayment period.|
|Credit Counseling||Working with a credit counselor to create a debt management plan.||Professional guidance, tailored plan.||May incur fees; not suitable for all debt types.|
|Bankruptcy||Legal process to eliminate or repay debts under court protection. In July of 2020 alone, approximately 569,881 people filed for bankruptcy.2||May eliminate debts, fresh financial start.||Severe credit impact, legal fees, long-term effects.|
Limit New Credit Inquiries
A hard credit inquiry may bring down your credit score by up to five points. And so, if you are trying to improve your credit, it is best to avoid multiple inquiries within a short period of time; keep that in mind if you are considering a new loan or credit card option.
Diversify Your Credit
Another factor that impacts your credit is the type of credit accounts you have. Having a good mix of different credit accounts will help your credit score. For example, if you have $10,000 in debt and all of it comes from credit cards, it may possibly look worse than $10,000 with a personal loan, credit card, or auto loan. Although having several kinds of credit accounts may seem counterproductive to paying off debt, it can help if you pay the debts responsibly.
The Bottom Line About What Derogatory Means Towards Credit
When the word derogatory comes up when referencing credit, it usually refers to derogatory marks on your credit report. These marks will show up when you take a negative action with your finances—for example, missing a due date for a credit account or defaulting on a loan. Most of these derogatory marks will also bring down your credit score and, even if they don’t, will look bad to prospective lenders, landlords, and even employers. The good news is that these things fall off eventually, usually within a span between seven and ten years. You can also rebuild your credit while you wait for them to fall off your credit reports.
Derogatory Marks on Your Credit Report: FAQ
Yes, if you find a derogatory mark on your credit report that you believe is incorrect or unjustified, you have the right to dispute it. You can file a dispute with the credit bureau that reported the mark, providing evidence to support your claim. If the dispute is successful, the derogatory mark will be removed from your credit report.
Different derogatory marks can have varying impacts on your credit score. More severe marks like bankruptcy or foreclosure may have a more significant negative effect compared to a single late payment. The impact also depends on other factors in your credit history, such as the age of the account and the overall credit utilization.
While derogatory marks can make it more challenging to get approved for credit, it’s not impossible. Some lenders may still approve you for credit but at higher interest rates or with less favorable terms. Building a positive credit history in other ways and considering specialized products for those with poor credit can increase your chances of approval.
Regularly checking your credit report is essential to monitor for any derogatory marks. You are entitled to one free credit report from each of the three major credit bureaus (Experian, TransUnion, Equifax) every 12 months. Additionally, many financial institutions and online services offer free credit monitoring, which can alert you to changes in your credit report.
Derogatory marks should fall off your credit report after a specific period, usually seven to ten years, depending on the type of mark. If a derogatory mark doesn’t fall off as expected, you can file a dispute with the credit bureau, providing evidence of the expected removal date. If the dispute is valid, the credit bureau should remove the mark promptly.
A Note From Your Friends at CreditNinja
Having derogatory marks on your credit report is never fun. Not only do derogatory marks on your credit bring down your overall credit score, but they can also hinder you from being able to find approval for affordable funding. At CreditNinja, we seek to be a sustainable financial solution for bad credit borrowers going through a financial emergency.
You may also access free resources on managing your finances, researching online loans, building credit, and more at the CreditNinja blog dojo!