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What Does Derogatory Mean and How to Fix it?

by Team Finance Meaning
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What does derogatory mean? It is a term used to describe the negative information on a borrower’s credit report. Lenders use this term to explain the debtor’s reason for defaulting on payment. What is derogatory credit is another question closely related to derogatory marks. 

Derogatory credit items are those accounts affected by the negative information on the credit report. They include high balances, previous delinquency, charge-offs, and collection accounts. Here’s more about the subject.

What is Meant by Derogatory Marks?

Derogatory marks are negative and long-lasting indications included on your credit report to show you didn’t pay back a loan. And if wondering whether derogative vs. derogatory are different terms, rest assured that both words have the same meaning. 

The marks can last as long as ten years, depending on the type of debt you have defaulted. They also lower your credit score, making it challenging to secure favorable loan terms. Derogatory marks can appear on a borrower’s report in two ways. 

A lender or a creditor may report negative information to the credit bureau, translated as a derogatory mark. Alternatively, the credit bureau can add negative information if it’s a matter of public records. For example, if the borrower has filed for bankruptcy, has a tax lien, or obtained civil judgments.

According to the Equal Credit Opportunity Act, if the lender provides the information, they must give a specific reason for including derogatory marks on your credit report. The lender then sends this information to the debtor before handing it over to the credit bureau. 

This is an opportunity for the debtor to verify the derogatory mark and file a dispute if it’s in error. If they are correct, you must wait for them until the age of the credit report. What does derogatory mean go beyond knowing its meaning? It’s important to understand its impact on a borrower’s credit score and a solution for this problem.

How Do Derogatory Marks Impact My Scores?

Derogatory marks lower your credit score significantly, but the scope of impact depends on a few factors. The first is your credit score level. If the borrower has a high credit score, a derogatory mark affects this score more than one with a lower score. The derogatory marks damage the score less than those caused by major events like a foreclosure due to late payment. 

Factors that Impact Derogatory Marks on Your Credit Score

Different factors lead to derogatory marks on your credit score:

Late Payment

If you are 30-60 days late to make a credit card payment or pay for your car loan, you get a minor derogatory mark. However, if the late payments extend for more than 90 days, you get a significant derogatory mark.

Bankruptcy

When a borrower defaults on payment and files for bankruptcy, they receive a derogatory mark.

Civil Judgement

If sued, you’ve been sued by a creditor for failing to pay the debt, and you lose the lawsuit, you may be compelled to pay debt or damages. Such a civil lawsuit appears on your credit report.

Debt Settlement

If you settle the debt through an agreement with the creditor to pay a portion of the debt you owe, the arrangement appears on your credit report as a derogatory mark.

Foreclosure

In case a borrower defaults on a home loan and the bank seizes the property, the foreclosure is reported to the credit bureau. 

Tax Lien

Failure to pay taxes may cause the federal government to place a lien (usually against your property) to collect the debt. Tax liens also appear on credit reports as derogatory marks.

How Long do Derogatory Marks Remain on the Credit Score?

This period depends on the reason for getting a derogatory mark on your credit report. The Fair Credit Reporting Act also dictates the amount of time each mark remains on the credit card. For example, debtors who get a derogatory mark due to foreclosure must wait up to seven years for the mark to age off. Here’s a brief:

Reason for Derogatory MarkPeriod the Marks Remains on Your Credit Score
Late Payment7 Years
Bankruptcy7-10 Years
Civil Judgment7 years for paid civil judgment7 years for unpaid civil judgment
Debt Settlement7 years from the date the debt was settled or from the date of the first delinquent payment
Foreclosure7 years from the filing date
Tax Lien7 years from the filing date if paidIf unpaid, it may remain on the report indefinitely.

How to Deal with Derogatory Marks?

All’s not lost; you can restore your credit score and obtain credit even before the period expires. Here’s how:

Review Your Credit Reports

The first step is to review your credit report to determine if there are derogatory marks. Credit reports show two types of derogatory marks: closed and open marks. The former is a result of closed accounts like those in collections and accounts that have been charged-off.

Open derogatory marks, on the other hand, are caused by open accounts like credit cards. While at it, ensure all the information in the report is accurate, including personal and negative information.

Dispute Incorrect Derogatory Marks

If you identify incorrect derogatory marks, file a lawsuit with the credit bureau or the creditor to correct the negative information. The bureaus must investigate the dispute within 30 days of filing. 

Start Healing Your Credit

If the derogatory mark is correct, you can start restoring your credit right away. For example, paying bills on time and using less than 30% of your credit limit improves your credit score significantly.

This is because recent credit history affects your score more than old derogatory credit terms. While you might not have excellent credit until the derogatory marks are removed, an improvement in your score enables you to qualify for credit card loans.

It would also help if you requested a credit line increase from your credit card company. If you’ve been paying for a credit card debt on time, have been a loyal customer, or had a good credit score, you may qualify for an increase.

Once you get a credit line increase, your overall credit utilization rate reduces, which improves your credit score. And if you’ve been a spendthrift, it may be time to create a budget. Budgeting helps monitor your spending habits and tracks your money.

Wait for the Mark to Fall off Your Reports

Sometimes, the only option is to wait for the mark to age off. If you’re taking the proper steps to restore your credit score, your credit should start rebounding after two years of the derogatory mark appearing on the report.

Frequently Asked Questions (FAQs)

Can a Derogatory Mark be Removed?

Yes, a derogatory mark can be removed using two methods. The first involves paying for a delete letter. This strategy requires the creditor to remove derogatory marks from your credit report to pay the balance you owe. Be sure to get the agreement in writing before paying the debt.

Alternatively, you can write a goodwill letter to the creditor asking them to remove the derogatory mark. This method is only viable if you missed a payment but later paid for it. 

How Long Does a Derogatory Mark Stay on Your Credit Report?

The amount of time a derogatory mark stays on your report depends on the type of debt defaulted. The Fair Credit Reporting Act stipulates how long the remark stays on a credit report.

Does Removing Derogatory Marks Improve Credit?

Yes, it improves a debtor’s credit score. If the mark has reduced your score by a specific number of points, it increases by the same amount once it’s removed. For example, if 100 points had reduced the score, it would increase by the same points when removed.

Is a Derogatory Mark Bad?

Yes, it is. Our initial description explained a derogatory mark as negative information that hurts your credit score and deters you from favorable credit terms. As such, you want to avoid having derogatory marks on your credit report at all costs.

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