what are derogatory items?Credit reports are essentially the report cards of your financial life and, like report cards, credit reports have a grading rubric that must be thoroughly understood to read them properly. Many people are familiar with credit scores and even credit ratings like fair and excellent, but they may not know what derogatory items like collections or charge-off are or mean. Keep reading to learn more about derogatory items and some of the most common ones that may appear on your credit reports.

What are derogatory items?

Derogatory items are severely damaging marks that appear on credit reports due to poorly managed credit or identity theft. Actions like late or skipped payments can eventually lead to the presence of derogatory marks on your reports, with each mark corresponding to a specific circumstance or outcome. Below are a few examples of some key derogatory items you should know about:

  • Charge-off: A charge-off is one of the worst marks a person can receive on their credit report, as they occur when a lender determines that someone is unable (or unwilling) to pay off a debt they’ve been delinquent on for several months of payments. Even though the lender determines the borrower is unable to pay, the lender is still able to legally demand payment in full for as long as the state’s statute of limitations allow. It should be noted that it’s possible for charged-off debt to be settled for less than its full value, but credit reports will usually note that the debt was not paid in full should this happen.
  • Collections: Sometimes debt goes to a collections agency after a lender or service fails to receive payments. While having this designation on your credit report is pretty severe, you can work with a collections agency to make paying the money back a bit easier. You can even negotiate conditions for the mark to disappear from your reports completely after you make the agreed-upon payments.
  • Court Judgement: Judgements refer to civil court rulings usually made against one party who owes money to another (like in a lawsuit from a creditor or any other lawsuit involving money). Since judgements are a matter of public record, they can easily appear on credit reports.
  • Default: A default, especially on certain types of loans (student, car or home), can create a serious blemish on credit reports. In many cases, a default can be a precursor to many of the other items on this list, as it’s one of the first derogatory items that will appear on a delinquent individual’s credit reports. For example, a default could appear on your credit reports before the account is sent to collections. This is why it’s extremely important to take defaults seriously and address the problem that caused them immediately.
  • Repossession: A repossession typically happens when you default on a secured loan, meaning you offered something in collateral. If this occurs, whatever you offered as collateral for the loan, like a car or home, will be taken by the lender. This most commonly happens for mortgages and auto loans, where the home or car purchased with the loan is taken. It’s important to note that if the present value of the repossessed item doesn’t cover the full remaining balance on the loan, you could still be on the hook for more payments.

These items are by no means an exhaustive list of derogatory marks, but they are some of the worst and most damaging, making it important to be aware of them.

How do I know if my credit reports have derogatory marks?

The easiest way to know if your credit reports contain any derogatory marks is to check your credit reports and scores. If you don’t already know, federal law allows you to get one free copy of all three of your credit reports — Experian, TransUnion and Equifax — once per year through AnnualCreditReport.com. You can also check your credit scores through that site, but you must pay a small fee per score. Another way to stay in touch with your credit reports and scores is through a credit monitoring service. These services will not only allow you to check your credit reports and scores upon signup, but also alert you if something is changed or added to your credit reports or scores, which is especially helpful if you’re working to build your credit. What’s more, a number of these services offer free trials, allowing you to test the service without making a financial commitment. This means you can sign up for a free trial, receive your credit reports and scores, and then cancel the service if you’re unsatisfied with it. Visit our credit monitoring reviews to find the service that’s best for you.

Is it possible to improve my credit after receiving derogatory marks?

If you find yourself with any one of the negative marks mentioned above, don’t lose hope. While none of these things is good for your credit, in time they’ll naturally go away. Most derogatory items only stay on your credit report for about seven years, with some having the potential to disappear sooner, especially if you make an agreement with your lender to get them removed. As your credit history grows, the weight that these items are given also decreases, even if they’re still physically present on your reports. In addition, there’s a lot you can do to start building your credit again almost immediately. Given that most of these marks are the direct result of failed payments, working out a payment strategy to pay off any balances is a solid first step toward restoring your credit. Investing in a secured card and using it diligently and responsibly is another smart move that will aid further in repairing your credit.

Check out our secured credit card reviews to learn more about this option and find the best card for you. Also, for more information about keeping your credit score healthy, keep reading our credit monitoring and credit repair blogs.