How derogatory marks harm your credit report

If you’ve been keeping an eye on your credit, you may be familiar with the term “derogatory marks.” These entries on your credit report can have significant negative impacts to your financial health—and by learning more about them, you’ll be better equipped to address them effectively.

In this article, we’ll break down what derogatory marks are, the types you might encounter, how they affect your credit, and what you can do about them.

What are derogatory marks?

Simply put, derogatory marks are negative entries on your credit report that show you didn’t meet financial obligations. Think missed payments, loan defaults, and even bankruptcies. These marks are red flags for lenders as they signal a borrower has a history of financial issues.

Why understanding derogatory marks matters

Here’s why it’s worth taking the time to understand these marks:

• Your credit score drops: Derogatory marks can significantly lower your credit score, making it harder to qualify for loans or get a competitive interest rate.
• Loan approval gets tougher: Some lenders have strict policies against offering loans to borrowers with derogatory marks.
• Your reputation takes a hit: Your credit report paints a picture of how you handle money, and negative marks can hurt your reputation.

How derogatory marks are reported

Credit reporting agencies like Equifax, TransUnion, and Experian compile your credit history information from lenders, which is then processed to generate your credit score. The scoring model used considers several factors, and any derogatory marks will play a major role in determining your score.

Common types of derogatory marks

Late payments

• What it means: You didn’t pay a bill by the due date. Once a payment’s marked late, the severity of its impact to your score can increase every 30 days.
• How long it lasts: Up to seven years from the first missed payment date.
• What you can do: Pay off the overdue amount as soon as possible. Then, reach out to your lender to ask if they’ll waive late fees or update your account.

Charge-offs

• What it means: A lender gave up on collecting your debt after a prolonged period of non-payment.
• How long it lasts: Up to seven years.
• What you can do: Settle the debt quickly. By being proactive, you may be able to negotiate a payment plan or reduced settlement amount—only paying a percentage of what you owe.

Bankruptcy

• What it means: You filed for legal protection and relief from your debts. The most common types of bankruptcy are Chapter 7 (liquidation) and Chapter 13 (reorganization).
• How long it lasts: Chapter 7 bankruptcies can remain on your credit report for ten years, while Chapter 13 typically stays for seven years.
• What you can do: After filing for bankruptcy, start rebuilding your credit with financial tools like secured credit cards or credit-builder loans.

Civil judgments

• What it means: A court ruled against you in a lawsuit involving unpaid debts.
• How long it lasts: Even if you settle the judgment, it can remain on your report for seven years. If unaddressed, unpaid judgments may be renewed, staying even longer.
• What you can do: Pay the judgment. Depending on your state laws, you may be able to ask for its removal.

Debt settlements

• What it means: You and your lender agreed to settle the debt for less than the full amount owed.
• How long it lasts: Up to seven years.
• What you can do: Document the settlement and stay on top of other payments to improve your credit.

Foreclosures and repossessions

• What it means: Foreclosure occurs when a lender takes possession of a property due to non-payment. Repossession refers to the lender taking back collateral for a loan.
• How long it lasts: Both can remain on your credit report for seven years.
• What you can do: If facing foreclosure, work with your lender to explore repayment options. For repossessions, paying off the loan can help mitigate the damage by reducing the outstanding balance owed.

Tax liens

• What it means: The government claims your property because of unpaid taxes.
• How long it lasts: Paid liens can stick around for seven years, but unpaid liens can remain indefinitely.
• What you can do: Pay your taxes and work out a plan with the IRS or a state tax agency if needed.

Student loan delinquency or default

• What it means: Delinquency occurs when you miss payments on your student loans, while default happens after a prolonged period of non-payment.
• How long it lasts: Both can remain on your credit report for seven years.
• What you can do: Contact your loan servicer to explore deferment, forbearance, or seek other options for student loan help.

How derogatory marks affect your credit score

Since your credit score is all about showing lenders you’re a responsible borrower, derogatory marks can have a big impact. Payment history (which includes derogatory marks) is a major factor, making up 35% of your score.

The credit score breakdown

Credit scores are calculated based on several factors, including:

• Payment history (35%): This is the most significant factor. Derogatory marks weigh heavily here.
• Amounts owed (30%): This considers your credit utilization ratio.
• Length of credit history (15%): A longer history can positively impact your score.
• New credit (10%): Opening multiple new accounts in a short period can negatively affect your score.
• Credit mix (10%): A diverse range of credit types can enhance your score.

Steps to address derogatory marks

If derogatory marks are holding you back, here’s what you can do:

1. Get your credit report

Start by checking your report from all three credit bureaus. You can get your free report at AnnualCreditReport.com.

2. Review for accuracy

Review your report for any inaccuracies. Common errors can include incorrect personal information, accounts that don’t belong to you, or inaccurate payment statuses.

3. Dispute inaccuracies

If you find errors, file a dispute with the credit bureau responsible for the incorrect information. Credit bureaus are required to investigate disputes within 30 days. If they can’t verify the information, it must be removed.

4. Communicate with your lenders

If derogatory marks are accurate but you want to mitigate their impact, contact your lenders. There may be repayment plans or settlements available that could offer you a better outcome.

5. Focus on rebuilding

Once the derogatory marks are addressed, it’s time to rebuild your credit. Make sure to pay your bills on time, keep your credit utilization low, and avoid applying for multiple credit accounts in a short period.

Can I remove derogatory marks?

While most derogatory marks stick around for seven years, there are two ways to get rid of them sooner:

1. Request removal for inaccuracies

If you successfully dispute an inaccuracy, the credit bureau must remove the derogatory mark.

2. Goodwill adjustment

In some cases, your lenders may agree to remove a derogatory mark out of goodwill, especially if you have a history of on-time payments.

The bottom line

Derogatory marks can make your financial life harder, but they aren’t the end of the world. By staying on top of your credit report, disputing inaccuracies, and practicing good financial habits, you’ll be on the road to better credit in no time.

This article is for educational purposes only and is not intended to provide financial, tax or legal advice. You should consult a professional for specific advice. Best Egg is not responsible for the information contained in third-party sites cited or hyperlinked in this article. Best Egg is not responsible for, and does not provide or endorse third party products, services or other third-party content.