Having a derogatory mark on your credit report can lock you out of the system but there is a solution
If you’ve ever been denied for a loan, there’s a good chance you got a letter saying it was because of derogatory marks on your credit report. That’s what started happening to me in 2009 after ruining my credit.
It came as a shock. I had never had trouble getting a loan before but here I was locked out of the system.
I think that was my wake-up call, the point I knew my finances were in deep trouble and I needed to get them back on track.
What are derogatory accounts and how do they affect your credit? Is it just another way for lenders to keep you locked out of getting the money you need? Is there anything you can do about it?
What Does Derogatory Mean on a Credit Report?
A derogatory mark or action on your credit is anything the credit bureau recorded on your credit report that hurts your credit worthiness in the eyes of lenders.
The most common derogatory items are late payments and charge-offs but there are several other kinds you need to watch for.
- Late payments – If you are late more than 30-days on any payment that goes on your credit, i.e. credit cards, car loans and mortgage, then it will go on your report as a derogatory mark. The marks get worse for every 30-days you are late so having a 60-90 days late noted is worse than a 30-60 days late.
- Charge Offs – When the original lender has assumed you aren’t paying and sent your debt to a collections agency, it’s marked charged-off on your credit report. This usually happens after being late more than 120-days on your payment.
- Bankruptcies will be recorded on your credit report and are one of the worst derogatory marks you can get.
Besides these common financial marks that can hit your credit, there are a few you might not know about.
- Tax liens – Failing to pay your taxes and you could get a derogatory mark if a lien is recorded against you.
- Civil judgements will also be recorded on your credit report. This includes evictions and civil lawsuits. These negative remarks stay on your report for seven years but can be renewed by the plaintiff for another seven years.
How Do Derogatory Marks Affect Your Credit Score?
Derogatory marks on your credit report are what decreases your credit score. The credit scoring system used by FICO looks at these derogatory items and takes points off your score depending on how bad they are and other factors in your credit history.
And they can really destroy your score.
I had excellent credit for years. I was able to get loans for rental properties whenever I wanted. Then I missed a few payments and my score tumbled.
FICO studied the average loss in credit score after a derogatory mark was added to someone’s report.
Notice that the effect on your credit score is worse for people with better credit, they have the farthest to fall. A credit score under 620 is considered ‘sub-prime’ and you’ll have trouble getting a loan or one with rates you can afford.
Derogatory marks stay on your credit report for seven years except bankruptcies which are listed for ten years. Even if you make your payment or close the account, that missed payment is going to haunt you for a long time.
Even if your credit score increases, derogatory marks on your report can still keep you from getting a loan for seven years.
The Equal Credit Opportunity Act prohibits lenders from asking about or denying you a loan based on sex, race, color or religion but derogatory marks are one of the few things that can be used to deny you money.
One loan can actually cause several derogatory marks on your credit report, a charged-off account by a creditor and missed payments to the collection agency.
How to Remove Derogatory Items from Your Credit Report
Getting derogatory items off your credit report should be your top priority when trying to improve your credit score. They’ll drop off after seven years but you don’t want to wait that long to get loans or better rates.
Derogatory marks will be listed on both open and closed accounts, so it’s not as simple as just closing the credit card. Those missed payments and charge-offs will still remain.
Your best bet is to dispute the item with a letter to the credit bureau. This means writing a letter to each credit bureau (Equifax, TransUnion, Experian), saying the item should not be on your report.
Technically, credit disputes are for when there is an error on your report but it also sometimes works for mistakes you made. The credit bureaus are required by law to contact your creditors and investigate your claim within 30-days.
If the creditor that reported the derogatory mark doesn’t respond, it will get taken off your report. Sometimes creditors, especially ones with closed accounts on your report, won’t take the time to respond back to the credit bureau.
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Paying Off Derogatory Accounts
You might also be able to strike a deal with creditors to get a derogatory item take off your report.
If you still owe money on the account, contact the collections department and negotiate to pay the account in full if they remove the remark. If they say they can’t then threaten to close the account.
It’s not something that will work 100% of the time but just getting a couple derogatory remarks off your credit will boost your score and help get lower rates. Late payments are easier to get removed while bigger marks like a foreclosure or bankruptcy are almost impossible to get removed early.
Make sure you get any agreement in writing and signed by your creditor.
I was able to get a couple of derogatory marks removed from my credit report and almost immediately saw better rates on loans. Loan officers were once again smiling when I walked in the door instead of telling me to turn around and not even bother asking for a loan. Getting your credit back on track just means understanding what happened and how to fix it.