You may have heard the term derogatory before, but maybe not related to your finances, including your credit. Derogatory can mean a few negative things when talking about credit, and knowing more detail can really help you come up with a strategy to improve your finances. 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 will show up on your credit reports and hurt your credit scores.
Below are 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:
Any time you miss a payment and have to pay it after the due date (which will mean a late fee), it will be reported to the three credit bureaus. That will then show up on your credit report. Having even a single missed payment will lower your credit score. Your payment history is the most significant factor impacting your credit score, so even one late payment will 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 reported 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 will not. However, a collections account on your credit report will not look good for prospective lenders.
A bankruptcy will be a substantial derogatory mark on your credit. Bankruptcy will bring your credit score down several points and be a huge negative if a prospective lender sees it. And so, getting any loan or credit account will be highly challenging with a past bankruptcy.
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. A 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 credit report from all three consumer reporting agencies. So make sure you get your Experian credit report, TransUnion credit report, and Equifax credit report. 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 Eventually?
Derogatory marks do go away; the period that something will stay on your record depends on the type of action listed. For late payments, collection accounts (once they are paid off), foreclosure, chapter 17, and loan default, the average time they will stay on your credit reports is seven years. While chapter 13 bankruptcy will 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 will 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 loan options out there, but they will come with high-interest rates, smaller loan amounts, and strict, predetermined repayment lengths. With good credit, you’ll 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 will 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 on your credit, 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. Here are some strategies that can work well to help rebuild credit:
Make On-Time Payments With Loan Payments and Credit Card Accounts
One of the most effective ways to improve your credit is to make on-time payments with your bills. 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 will help your 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 debt repayment strategies out there that can help you. Whether you have various small debts or one large one, you’ll likely find a solution that works.
Limit New Credit Inquiries
A hard credit inquiry will 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 in a short period of time. Keep that in mind if you are considering a new loan or credit card option. If you want to compare loan options instead of final approval, use pre-approval. The pre-approval process does not come with a hard credit check, so it will not impact your credit score.
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 will look worse than $10,000 with a personal loan, credit card, and 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.