If your credit history is less than perfect, you’ve probably spent a lot of time researching how to repair it. During your research, you may have come across the term “derogatory item” in reference to your credit report. What exactly does this mean and how does it affect your credit score? In its simplest form, a derogatory item is a flaw in your credit history. The effect is that it hinders your credit score from improving.
Major Versus Minor Derogatory Items
Not all negative marks on your credit history are as bad as others. In fact, tens of millions of Americans fall behind on at least one bill every year. Two of the most common are credit cards and auto loans. Being a few days late should not lead to derogatory marks on your report. Your payment has to be at least 30 days late for lenders to report it. Even 60 days past-due is still relatively minor.
Anytime beyond 90 days is a major red flag for lenders, which reflects in a significantly lower credit score. Here are some additional major derogatory items that may ruin your credit:
- Short sales and settlements
- Home foreclosures
- Court judgments
- Accounts going to collections
The Effect on Your Credit
Credit Karma warns consumers that the most important factor determining your credit score is your payment history. In fact, it alone accounts for 35% of your score calculation. This is why late payments and the resulting actions affect your score so badly and cause you to pay such high interest rates. From a lender’s point of view, you become a risky borrower as they believe they may not get their money in full or on time.
If your late payments occurred years ago during a rough patch, you may wonder how long they may continue to hamper you for. Credit Karma estimates that they remain on your report for seven years. That said, if late payments were all in the past, they are less worrying to lenders than more recent ones.
The Effect on Other Areas of Life
If you’re nearing the seven-year mark on the most recent late payment, you may feel overjoyed at the prospect of having a flawless credit history on record yet again. However, this may not be the case. Even after some financial troubles expire from your official credit report, the reporting agencies may still share the information.
One instance where this may happen is if you try to get a life insurance policy worth more than $150,000. Another instance is if you apply for a job where the annual salary is more than $75,000. That said, many states limit an employer’s ability to check your credit. The House also passed a bill in the summer of 2019 that could ban employers from doing this nationwide.
How To Resolve the Issue
As the old cliche goes, there’s no use crying over spilled milk. You can only progress by moving forward. What many people grapple with is how.
1. Pay the Debt
Unfortunately, this won’t cause the derogatory mark to disappear from your profile. Even so, when you pay the debt, it signals to lenders that you do catch up and intend to pay what you owe. This may cause some lenders to view your credit report more favorably.
2. Adjust Habits
Good saving, budgeting and spending habits will keep you out of financial trouble in the long run. When you save, you rely less on credit. When you budget, you ensure all your bills get paid and you spend more responsibly. All of these show in your credit report over time.
3. Work on Other Factors
Payment is just one aspect of your credit report. Working on the remaining 65% helps you to improve your score. Here are the other four to watch out for:
- Credit usage
- Age of credit history
- Credit mix
- Hard credit checks
How Trade Lines Help
Tradelines increase your credit score by improving most of these factors. A new credit line increases your total available credit, which automatically lowers credit usage. Older credit lines also improve your credit age. Getting a mix, such as an installment loan to complement credit cards, is wise. Finally, having several accounts in good standing helps to dilute the effect of any flaws in your payment history over time.
If you still have questions about tradelines and how they work, check out our FAQs section at Coast Tradelines. For more detailed information, give us a call at 619-363-1472.