Understanding Derogatory Marks on your Credit Report
A derogatory mark can remain on your credit report for up to 10 years and cause a lot of damage to your credit score. But what exactly is a derogatory mark (also known as a negative mark or derogatory account) and how can it affect your credit score, and can it be removed?
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What is a Derogatory Mark on Your Credit Report?
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A derogatory mark is a negative mark that appears on your credit report following a financial mishap. It generally refers to any adverse outcome that has a long-lasting impact on your score, which means it includes bankruptcy and missed payments, but not hard inquiries.
Derogatory marks can appear on your credit report via one of two ways:
- Reported Information: Lenders send information to credit reporting agencies and this information is used to build your credit report and calculate your credit score. It includes all data pertaining to your payment history, including derogatory marks from collection accounts and late payments.
- Public Records: A credit bureau can add information to your credit report that is public record. This tends to be very damaging and can last for up to 10 years. It includes bankruptcy filings and tax liens, as well as civil judgments.
The many things that can cause derogatory marks include:
- Miss a payment (can include a student loan, credit card, or any other debt).
- Allow an account to enter collections or to be charged-off.
- Settle your debt via a debt settlement company.
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- File for bankruptcy.
- Your home is foreclosed.
- You have unpaid tax debts.
- You owe a debt through the courts.
How Derogatory Items Affect Your Credit
The way that a derogatory mark impacts your credit will depend on a number of factors, including your current credit score and credit history. If you have a bad credit score, the reduction may be minimal; if you have a good score it could remove up 150 points from your total.
This may not sound like much when you consider credit scores run from 300 to 850, but 150 is enough to send a previously “Exceptional” borrower into the “Fair” range, bypassing “Very Good” and “Good” on the way and greatly reducing their chances of securing low-interest loans.
You won’t see as big of a drop if your score is already low, but you could easily become one of the 16% whose scores are in the lowest possible “Very Poor” range, at which point you’ll be rejected for nearly all types of loans and credit cards.
Of course, it also depends on the type of derogatory mark. Bankruptcy, for instance, will impact your score much more than a late payment.
Open and Closed Derogatory Marks
There are two main types of derogatory mark: Open and Closed. These refer to the status of the account. An account that is in collections, for instance, will be classed as “Closed”, as is the case with ones that have been charged-off. An account that continues to receive monthly payments is classed as Open.
Both Open and Closed derogatory marks can seriously damage your credit score.
How Long Does It Take to Get a Derogatory Mark Removed?
There are a few ways you can remove derogatory marks quickly and with relatively minimal fuss. However, in most cases, they will remain for the term, which can vary depending on the type of mark.
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- Bankruptcy: Whether you file for Chapter 7 or Chapter 13 will dictate whether the mark remains for 7 or 10 years.
- Foreclosure: If you fail to make mortgage payments then your house may be repossessed, with the derogatory mark remaining for 7 years from the date of foreclosure.
- Short Sale: A short sale can appear as a settlement or charge-off and will remain on your credit report for 7 years.
- Collections: A collection will show for 7 years plus an additional 6-months from the date it was due. This may be true even if you clear the account in that time, although this isn’t always the case.
- Tax Liens: Will remain for 7 years from the date they were filed, providing they have been paid.
- Judgments: Both paid and unpaid judgments typically remain for 7 years, but it depends on the statute of limitations in your state of residence and on whether or not the judgment has been renewed.
What are the Permanent Effects?
Bankruptcy is one of the most damaging derogatory marks you can have, so let’s use that as an example. The average American credit score is around 700 (based on the latest FICO Score) and based on this score, bankruptcy can reduce it by between 130 and 150 points.
That’s a big hit to take in one go, especially if you have additional problems coming your way in the near future. However, once those problems have been dealt with, your score will gradually improve. There are ways that you can expedite this process and improve your credit score, but regardless of whether you employ a credit repair process or not, the effect of that bankruptcy will gradually reduce over time.
Once the 7- or 10-year period has elapsed, it will disappear completely and will no longer influence your credit report. There’s a good chance your credit utilization score will be low, as high-limit, low-balance credit cards are not exactly easy to come by during bankruptcy, so you’ll need to work on improving your score. But the worst of the process will be over and the effects of that derogatory mark will no longer be felt.
How to Avoid Derogatory Marks on your Credit Report
Everyone is at risk of getting a derogatory mark because no one is infallible. If you have active accounts, there’s always a chance that you will miss a payment or two, triggering a domino effect that ultimately results in a plummeting credit score and a litany of negative marks.
Keep your credit score strong and your credit report positive by following these simple rules:
- Be Aware of Your Credit Reports: Check with all credit bureaus at least once a year. You are legally entitled to a free credit report from each one every year and there are multiple free credit report services that can keep you informed all year long.
- Follow Through: Contact doctors and hospitals after appointments to make sure there is no remaining balance. As discussed in our guide to Medical Debt and Your Credit Score, medical bills are not added to your credit report unless they enter collections. Some debtors only learn about unpaid medical bills when they receive a derogatory mark or a demand from a debt collector.
- Pay All Debts: Don’t assume you have gotten away with debt just because it doesn’t show on your credit report. It may appear eventually and if you don’t make payments it could enter collections. Pay all debts or at least learn more about them to better understand your options.
- Make All Payments: Every monthly payment has to be made on time. The longer you delay, the more damage it will do to your credit score and the longer it will take you to recover and repair your credit.
- Use Debt Relief: If your debts are too high, consider debt management, debt consolidation or even debt settlement, but always read about them beforehand and make sure you’re aware of the pros and cons before you commit.
Strategies to Remove Derogatory Entries on your Credit Report
Contrary to what you might have been promised elsewhere, there is no sure-fire way to remove derogatory marks from your credit report if they are accurate. There are companies that promise to do this, but the vast majority are outright scams seeking to sell you on a service that doesn’t exist while the rest offer risky and immoral strategies such as buying tradelines.
These scams prey on the desperate and make a killing by exploiting the debt relief industry. Stay clear of them and trust your instincts—if it sounds too good to be true…well, you know the rest.
Check your Credit Report
Credit reporting agencies aren’t as reliable and flawless as you might think, far from it. They can, and often do make mistakes. An FTC study found that 1 in 4 consumers has an error on their report that is severe enough to impact their score. 20% of these have their reports fixed after filing a dispute with the credit bureau responsible; 80% experience modification of some kind.
The first step in any credit repair process, therefore, is to check your credit report and become acquainted with the specifics. Not only will this allow you to identify and deal with fraud and errors, but it will also ensure you’re fully prepared to tackle your financial issues head-on.
Right the Wrongs
If your credit score has dropped as a result of several derogatory marks, it’s fair to say that you didn’t have control over your finances. You need to change that going forward:
- Create a list of all outgoings and incomings.
- Calculate your debt-to-income ratio (DTI).
- If your DTI is high, acquire a debt consolidation loan or refinance.
- Start budgeting and making sacrifices.
- Prepare some emergency funds to cover you in the future.
Unsecured credit card debt and personal loans probably got you into this mess in the first place and should be avoided. However, there are a few forms of credit you can use to rebuild your score without taking a big hit in the process and without being subjected to countless refusals and high-interest rates:
- Secured Credit Card: A card that is “Secured” against a cash sum. It’s like a phonecard—you place some money on it and then use the card to spend that money. Every month your score will gradually improve and you’ll have a clean, positive credit account to your name.
- Lending Circles: We wrote an extensive guide to lending circles here, discussing how these programs can help you to quickly and safely build credit, without acquiring costly interest rates.
- Store Cards: A store card is basically a credit card with a high-interest rate and a ton of perks. These cards can be dangerous if you’re impulsive and have a history of running high credit card bills, but if you’re relatively responsible and have every intention of clearing your monthly balance, they can be useful. They’ll give you an account you can use to build credit and will provide you with additional features and perks. Keep the limit low to avoid temptation and don’t spend more than you can afford to repay.
Credit repair takes time and is not something you should rush into. Doing so could lead to regrettable and costly mistakes, such as opening new accounts you can’t afford or committing to a debt relief program that damages your score. It’s important to take your time.
Wait for 7 to 10 Years
After 7 to 10 years, the derogatory mark will disappear completely, but after just a few years you’ll start to notice its effects much less. From that point on you can begin to rebuild your credit so that when the derogatory mark finally clears, your score is in “Good” or “Very Good” standing.
Conclusion: Derogatory but Not Devastating
Derogatory marks are negative, there’s no denying that, and they can do some serious damage to your credit report. However, all this damage can be reversed with a little patience and perseverance and you can still have a strong credit report even with the odd negative mark.
So, don’t despair if you’re hit with a derogatory mark—stay cool, learn the cause, look at the solutions, and do all you can to avoid additional marks landing on your report.