Credit Score
Imagine for a moment that you’ve applied for a loan but received a notice saying your application has been rejected. Or maybe you have a credit card or bank account that lets you view your credit score, and the score is much lower than you expected. If you find yourself in this position, you might have derogatory marks on your credit history, and they may be causing you trouble.
To help understand what this all means, let’s define this unpleasant thing called a derogatory mark. Simply put, these negative marks are entries on your credit report which notate issues such as a late or missed payment, charged-off accounts, and other negative credit events. These marks reflect poorly on your payment history. And, since a large part of your credit score is based on payment history, a few late payments might really hurt you (from a credit perspective).
The “big three” credit bureaus (Equifax, TransUnion, and Experian) compile credit information from lenders. This information is processed by each credit reporting agency using special software, usually from a company named FICO®. This “scoring model” builds a credit score based on five categories:
- Payment history, 35%
- Amounts owed, 30%
- Length of credit history, 15%
- New credit, 10%
- Credit mix, 10%
Lenders rely on these credit scores as a standardized way to decide the creditworthiness of borrower and credit card applicants. A negative mark could significantly reduce your credit score for many years. In this article, we’ll explain what these derogatory marks are, and what you could do about them.
Types of derogatory marks
A negative mark can come in several varieties. We’ll run them down, find out what they mean, and see how long they’ll stay on your record.
Late payments
What it means. This mark means an account is past due. Once a payment is marked late, the severity of the mark can increase every 30 days.
How long it stays: Dating from the first delinquent payment, the credit bureau will keep the mark on your report for seven years.
What you can do: Pay the outstanding amount as soon as possible. Call your creditor, ask if they’ll waive any late fees. Explain your financial situation, work out a repayment plan.
Note: Late payments are the only “minor derogatory mark” in credit reporting. The rest fall in the “major derogatory mark” category.
Account in collections (or charge-off)
What it means: If an account becomes excessively late, the lender might “charge off” the account. Your account will be closed due to delinquent payments, and the amount owed will be written off as a loss. However, you still owe any outstanding money. They may send (or sell) the debt to a collection agency or file a lawsuit with the courts.
How long it stays: The charge-off will stay on your credit record for seven years.
What you can do: To avoid potentially being sued or having your wages garnished, pay off the debt as soon as possible. Call the lender and negotiate a debt settlement. Sometimes, lenders will let you pay off a percentage of what you owe, such as 40% of the total, just to get the account closed out.
Bankruptcy
What it means: There are multiple types of bankruptcy (six, to be exact) and Chapter 7 (Liquidation) and Chapter 13 (Reorganization) are the most common types of bankruptcy cases filed for individual consumers.
How long it stays: A Chapter 7 bankruptcy will hang around for 10 years, but a Chapter 13 bankruptcy will stay on your credit report for only seven years.
What you can do: Look for a credit-builder loan to improve your credit, or search for a credit card company offering a secured credit card. Both methods may help rebuild and improve your credit score.
Paid civil judgment
What it means: A paid civil judgment means someone has lost a civil lawsuit, and they’ve paid damages or outstanding debt.
How long it stays: Paid civil judgments remain on credit reports for seven years.
What you can do: Some state laws require judgments to be taken off credit reports after they’ve been paid off. Otherwise, you may have to wait until the seven-year reporting requirement is over.
Unpaid civil judgment
What it means: After someone loses a civil lawsuit, no payment of damages or outstanding debt has been made.
How long it stays: Seven years. If a civil judgment is still unpaid after seven years, the seven-year period could be renewed (if it is allowed in your area.)
What you can do: Pay off the debt or arrange a payment plan so the derogatory mark won’t be renewed. You could also appeal for a vacated judgment. This requires filing paperwork with the court appealing the original ruling or making an appeal on procedural grounds. A lawyer can help with this process
Debt settlement
What it means: You and a creditor have reached an agreement where you will pay back some — or all — of a delinquent account’s balance. As a debt management tool, this is a common way to address overdue accounts.
How long it stays: If satisfactorily paid off, seven years from the settlement. (Unless late payments are made on the settlement, then the clock might reset.)
What you can do: Not too much you can do if you’ve already paid off the settlement. You’ve already taken the best route. Keep on building up your credit.
Foreclosure or repossession
What it means: If someone doesn’t make their mortgage payments, the mortgage lender can foreclose on the property, taking back a house or land parcel. If someone misses loan payments on something like a car, boat, or RV, a lender can repossess the collateral as restitution.
How long it stays: These types of derogatory marks stay on your record for seven years.
What you can do: If the event is recent, contact the lender and see if you can come to repayment terms. Otherwise, make on-time payments to your other bills and accounts and pay more than the minimum payment (before the due date), if you can do so.
Tax lien
What it means: Tax liens are a completely different beast than anything related to private loans. When a person fails to pay taxes to a local, state, or federal government agency, the agency invokes a claim — the “lien” — placed against some kind of property.
How long it stays: A paid tax lien stays seven years from the filing date. If not paid off, an unpaid tax lien can remain on credit reports forever.
What you can do: Pay off the amount as soon as possible. Contact the responsible agency and request a settlement or account payment plan. Otherwise, the mark will always be on your report.
Student loan delinquency or default
What it means: If your student loan becomes delinquent, this is also a credit risk. For private student loans, late payments damage your credit after 30 days. Private student lenders can even take you to court to seek repayment, leading to another hit on your credit.
For late payments on federal loans, it’s 90 days before it goes on your report. If you miss payments for longer than 270 days on Federal loans, they move into default. That could lead to garnished wages, reduced tax refunds, and cuts in other federal benefits.
How long it stays: Like most of the others, this one stays on your report for around for seven years.
What you can do: Contact your lender or school. They may offer a repayment plan, or they might let you place the loan into deferment or possibly forbearance, which means pausing your payments for a limited time until you can repay them.
Can I dispute a derogatory mark?
There are several things you can pursue to clear up your credit, including identifying potential errors and getting them removed from your credit history.
The first thing to do is obtain a copy of your credit report. Once a year, you can get a free credit report from the big three bureaus. It’s easily done for free at Annual Credit Report. The sooner you get your report, the sooner you can start fixing any problems.
After you have your report, check every single item for accuracy – because credit report errors can happen. Go over everything, and if you find an error, file a dispute with the responsible credit bureau. Credit bureaus have a limited time (30 days) to investigate and respond to your dispute. If they can’t verify the information is correct, they are obligated to remove it — and removing derogatory marks is one path to better credit scores.
The bottom line
Derogatory marks on your credit report may limit your chances to be approved for loans and obtain good interest rates. Having bad credit isn’t anyone’s idea of fun, but don’t let it get you down. Rebuilding your credit is possible – it just takes time and effort. Know your history, make your plan, and you could be on your way to a better credit score!
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.