What Is A Derogatory Credit, And How Can I Remove It?

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Stanley tate

Student Loan Lawyer

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Derogatory credit marks refer to negative items that appear on your credit report. These hits to your credit occur if you have late payments, collections, charge-offs, or become delinquent or in default on items like student loans.

What are the repercussions of derogatory credit? Some repercussions of derogatory credit include difficulty obtaining credit cards, car loans, and a home loan. Your credit history determines your creditworthiness for potential lenders. With derogatory credit on your credit report, lenders will deem you a risky borrower.

Can a derogatory mark be removed? In some cases, a derogatory mark can be removed. If you believe that a derogatory mark is on your credit report by mistake, you can file a dispute with the credit bureaus. However, if the derogatory marks are not errors, you will need to wait for them to fall off over time as you practice good credit-building habits.

Items that can cause derogatory credit

What is considered derogatory credit? Delinquent credit accounts that are 60 to 90 days past due are considered derogatory credit. Lenders view these delinquent or unpaid accounts as signs that you may not be able to pay them back.

If you’re looking to reverse bad credit or avoid a derogatory mark, it’s helpful to know the types of derogatory marks that can occur on your credit report.

  • Missed payments: Any payment that is more than 30 days past due will show up as a derogatory mark. The severity of the impact on your credit increases the longer you go without paying.
  • Collections or charge-offs: When a creditor no longer feels you will repay them, they will write off or “charge-off” that debt for tax purposes. That’s when they can sell it to a collection agency. Both charge-off and collections can report on your credit.
  • Civil judgment: If you lose a civil lawsuit that requires you to pay damages or repay a defaulted loan, a judgment will be placed on your credit.
  • Debt settlement: If you reach a settlement on a defaulted loan, you get the financial boost of eliminating debt. However, the lender will report the loan as settled for less than you owe.
  • Foreclosure: If you fall behind on your mortgage payments, the bank can force the sale of the home to use as collateral to repay the mortgage loan.
  • Repossession: Like a foreclosure, a repossession applies to other assets like cars. A lender will repossess your vehicle, for instance, if you don’t make your loan payments. Then, they will sell it to recoup the outstanding debt.
  • Tax liens: If you fail to pay taxes on your property or financial assets, the government can place a tax lien against that asset. The tax lien will show up on your credit report too.
  • Bankruptcy: Chapter 7 and Chapter 13 bankruptcy can help you get out of debilitating debt. However, seeing this is a red flag to lenders that you’ve skipped out on your previous liabilities.

How do I know if I have derogatory credit?

When you enter delinquency, have a loan sent to collections, or have a car repossessed, the mark doesn’t go quietly. You’ll receive a barrage of phone calls and letters in the mail notifying you.

Nevertheless, if you’ve somehow managed to avoid all communications from your debt collectors, you may not even know about derogatory credit marks on your account. That’s why it’s crucial to regularly check your credit report and ensure that you pay any debts on time.

To check if you have derogatory credit, you’ll need to get a copy of your credit reports. Luckily, the Federal Trade Commission enacted the Fair Credit Reporting Act. This act allows everyone access to a free credit report annually.

Due to the COVID-19 pandemic, the 3 credit reporting agencies — TransUnion, Equifax, and Experian — are offering free weekly credit reports until April 20, 2022.

To get copies of your credit report, go to AnnualCreditReport.com.

To keep an eye on your credit, I recommend that you regularly:

  • Review your credit report for any negative information.
  • Look for any late payments in your payment history and ensure you’ve addressed them.
  • Examine the public records section for any outstanding judgments or liens.
  • Go through the consumer credit section for any collection accounts.

How to repair derogatory credit from student loans

There are a few ways you can fix the damage caused by derogatory student loans. To determine the best plan of action, you’ll need to know whether the derogatory credit is justified or not.

If the derogatory credit is there due to an error, you’ll need to file a dispute. Unfortunately, disputing errors on your credit is up to you to prove.

If you’re in forbearance or deferment and your credit report is showing late payments, you’ll need to submit letters from your lenders or any other proof that you haven’t missed any payments.

If you’ve fallen behind on your student loans and the derogatory credit mark is accurate, hope isn’t lost yet. You still have ways to repair your credit.

Option 1: Repayment

If your student loans are delinquent or in default, you can pay off the outstanding balance in full. However, this is likely the most expensive option as you’ll be paying all of your accumulated interest and collection fees.

Repayment may be difficult since the entire outstanding balance is due once your student loan enters default. If you still owe a large amount on the loan, you likely don’t have that cash on hand.

What’s more, paying off your entire student loan balance won’t remove the late payments or the default from your credit report. However, it will stop the damage and start the clock for the derogatory items to age off your credit history.

Option 2: Settlement

Another choice that also requires a large lump sum is a student loan settlement. If your loans are in default, you may be able to negotiate a settlement. Typically, student loans must be in default before a lender considers a settlement.

If your defaulted student loans are federal, you’ll likely settle for around 85-90% of the remaining loan balance. You can expect to settle for between 40-70% of the balance for private student loans, depending on the lender.

Option 3: Rehabilitation

The best way to repair derogatory credit caused by student loans is through rehabilitation. If your defaulted student loans are federal, you may be eligible to enter the rehabilitation program.

Once you’re in the rehabilitation program, you will need to make 9 on-time monthly payments within a 10-month period.

The default will be removed from your credit report when you’ve completed the student loan rehabilitation program. However, the late payments will stay put.

The good news is, you’ll enter a new repayment plan and begin accumulating on-time payments, which will help you build good credit going forward.

Other ways to improve your credit score

The credit scoring models that calculate your FICO scores are a secret that the credit bureaus notoriously keep a secret. That being said, credit repair companies and other companies have learned a few tricks that can help.

While you can’t always remove negative credit items like late payments, there are other things you can do to offset the effect on your credit scores. These measures include:

  • Paying down your credit cards. Your credit utilization rate is a significant factor in your credit scores. By paying down your credit cards, your credit utilization will decrease while increasing your score. If you can’t squeeze the extra money to pay down your credit cards, try talking with the credit card company. You may be able to negotiate a lower interest rate or an increase to your credit limit.
  • Getting a personal loan. Consolidating your debts is only a good idea if you know you can make the payments. By getting new credit, you can start establishing good credit with on-time payments. Your score will take an initial hit from the inquiry in the short term, but over time, your score will improve.
  • Continuing to make on-time payments. The longer your debts go unpaid, the harder it will be to get back on track. Conversely, building a habit of on-time payments can improve your credit score.
  • Catching up on past due accounts. If you have delinquent accounts, paying off the amount that is past due will go a long way. If you handle the issue promptly, you may be able to prevent your student loans from going into default.

How long does a derogatory credit mark last?

How long a derogatory credit mark stays on your credit report depends on what kinds of derogatory credit you have. Each type of negative item stays on your credit report for a different amount of time.

How long does derogatory credit last? Most derogatory credit items will last on your credit report for 7-10 years.

Some derogatory credit stays on your credit report even longer. Unpaid tax liens, for instance, can remain on your credit report indefinitely. Chapter 7 bankruptcy can remain for 10 years.

For student loans, a default will stay on your credit report for up to 7 years after the account is paid in full.

Need help repairing your credit?

If you’re struggling with your student loans and have credit issues, I have years of experience helping people just like you. There are plenty of options to get you back on your feet.

Schedule a free 10-minute call with me to talk about your individual needs. Together we can find the best way to deal with your student loans and begin to repair your credit.

Sources

  1. FTC Free weekly credit reports during COVID extended until April 2022 https://www.consumer.ftc.gov/blog/2021/03/free-weekly-credit-reports-during-covid-extended-until-april-2022
  2. FTC Fair Credit Reporting Act https://www.consumer.ftc.gov/articles/free-credit-reports
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I'm a student loan lawyer that helps people like you with their federal and private student loans wherever they live.

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