Derogatory accounts don’t have to hurt your credit score if you know the tricks around them
We’ve all been there. You miss one payment and your credit score plunges. How does that bad mark on your credit report affect your score? How do derogatory accounts destroy your credit?
More importantly…how can you fight these credit killers and come out on top?
Let’s start with a quick definition of derogatory accounts and how they hurt your credit score. I’ll then show you why not all bad marks on your credit are created equal and what to do about them.
What is a Derogatory Account?
A derogatory account is just another way to say a bad mark on your credit report. It notes a loan or line of credit that has one or more late payments, unpaid debts or other charge-offs.
Some accounts reported on your credit might even result in multiple derogatory marks. If you fail to pay on a loan an it’s sent to a collection agency, the original lender might have a derogatory account on your credit report as well as the collection agency if they are unable to collect.
Civil judgements against you also go on your credit report and are counted as derogatory marks when applying for a new loan.
How Do Derogatory Accounts Hurt Your Credit Score?
Every derogatory account on your credit is like another strike against you when it comes to getting a loan or improving your credit score. Each bad mark will lower your FICO, resulting in higher rates, and may get to the point where you get denied a loan.
How much a derogatory account hurts your credit score depends on a few factors:
- Your credit score before the derogatory remark – The higher your score is, the more points you’ll lose with a bad mark. You know what they say, “The bigger they are, …”
- The number of derogatory remarks on your report can affect your credit score. A lender might overlook one late payment against a history of being on-time. It’s more difficult to overlook if you’re constantly late or in default.
- The type of debt or derogatory remark will affect how bad it hurts your score.
- How long you’ve had credit and the number of on-time payments on your report will affect how much a derogatory mark affects your FICO.
This table shows the differing effects a derogatory account can have on your credit score. Bankruptcies and foreclosures affect your FICO much more than late payments. Starting from a higher credit score, you’ll see more points lost for the different types of bad remark.
How Long Does a Derogatory Account Stay on Your Credit Report?
Derogatory accounts will generally stay on your credit report for seven years but can show for as long as 10 years for some accounts and in some states. This will usually depend on the laws in your state and the type of debt.
Bankruptcies, the granddaddy of debts, will stay on your credit report for up to 10 years in most states while foreclosures and student loans will drop off after seven years. Tax liens and simple late payments will generally drop off after seven years.
It’s important to understand when the clock starts ticking on different types of derogatory accounts and how that affects when they drop off your credit report. This is usually the date the late payment or other bad mark was added to your credit but can also be the date of your last payment or when the collection agency took over. If you make a payment plan with the collection agency or they file a change to the debt, that might start the clock over and it could be another seven years before it drops from your report.
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What is the Difference Between Derogatory and Delinquent?
Derogatory remarks are worse than delinquent accounts for your credit. Delinquent means you’re simply late on the account but still expect to pay it off. Derogatory means you’ve stopped paying and will likely default.
The technical difference is usually 180 days. Accounts will be marked delinquent until you’re 180 days late on the payment but will switch to derogatory after that point.
How to Remove Derogatory Remarks from Your Credit Report
You have the right to remove any mistakes from your credit report under the Fair Credit Reporting Act (FCRA). Under this law, credit bureaus are required to have procedures for investigating mistakes on your report and have a standard for accuracy.
That means you have the right to dispute all incomplete or inaccurate information on your credit. Dispute forms are available online for each bureau; TransUnion, Equifax and Experian. After you dispute an account, creditors have 30-days to respond or it will be removed from your report.
Of course, this doesn’t help as much for legitimate derogatory remarks. If there is a bad mark on your credit report because of late payment or default, there are a few things you can try to get it removed.
- Negotiate with the creditor to have it removed or marked as “Paid in Satisfaction”. This might mean offering to pay the entire balance in full or to get back on a payment plan.
- Ask the original lender to take the account back from collections and mark the account paid if you settle in cash.
- Dispute the derogatory account as a mistake. This can work for old and closed accounts if the lender doesn’t take the time to respond to the credit bureau.
A derogatory account on your credit report doesn’t have to mean the end of the world but you do need to understand how it affects your credit. Knowing the different types of derogatory remarks can help understand how it will hurt your FICO and how you can get it removed.
Having a derogatory account on your credit report can significantly hinder your ability to get a loan. In fact, loans such as mortgages or auto loans are almost impossible for people with derogatory accounts on their credit reports. This means that if you have derogatory accounts in your credit report and you're planning to buy a home or car then you must find away to remove these accounts from your credit report completely. Fortunately, having derogatory accounts removed from your credit report is not impossible. I hope this article gave you an idea on how to destroy derogatory account on your credit report once and for all.
Read the Entire Credit Series
- Is 602 a Good Credit Score?
- How to Get No Credit Opportunity Loans with OppLoans
- 5-Minute Template to Dispute Credit Report Letter
- How to Fix My Credit to Buy a House
- How Your 640 Credit Score is Holding You Back
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.