In a perfect world, there would be a crash course in credit where you would learn everything you need to know to navigate the world of finances. Unfortunately, learning about credit reports and credit scores is not included in mainstream American education.
This article addresses some of the most frequently asked questions about credit reports and credit scores.
- How Often Does Your Credit Score Change?
- What Does “Derogatory” Mean on Your Credit Report?
- How Can I Get a Derogatory Mark off My Credit Report?
- What is a Charged-Off Account?
- How Long Do Collections Stay On Your Credit Report?
- How Long Do Hard Inquiries Stay On Your Credit Report?
- How Long Does a Foreclosure Stay On Your Credit Report?
- How Long Will a Bankruptcy Stay On Your Credit Report?
- How Long Will a Late Payment Stay On Your Credit Report?
How Often Does Your Credit Score Change?
Short answer:
Every 30-45 days.
Long answer:
Your credit score is based on the data in your credit report. The three credit reporting agencies, Experian, Equifax, and TransUnion, are constantly gathering this data. It is sent to them by your lenders and financial intuitions that you associate with, which are also referred to as furnishers.
The data for the previous 30 days is reported every 30 days. Some furnishers send in their data every 60 days or even once a quarter.
This cycle means that not every furnisher is reporting at the same time. Your credit score changes each time your report is updated; however, you may not realize it has changed until you or a potential creditor requests your credit information.
If you use a credit monitoring service, don’t let the small changes that can occur daily frighten you. What you have to look at are the long-term changes. If you notice any extreme changes, you should pull your credit report and determine why. A sudden large change that you cannot account for can be an indication of identity theft.
If you manage your money wisely, pay your bills on time, and don’t apply for credit often, you don’t need to be concerned with how often your credit score changes. But, if you are working to repair your credit and want to monitor it for increases, you can expect to see the bulk of changes monthly.
What Does “Derogatory” Mean on Your Credit Report?
Short answer:
It means negative, unfavorable, and damaging, among other things.
Long answer:
Derogatory is not a word you want to be associated with your credit report. Derogatory marks on your report are negative entries sent in by the companies that manage your financial accounts, such as banks, credit card companies, and even your utility companies.
These entries can follow you around for seven to ten years or even longer and prevent you from getting the best interest rates or even being approved for credit.
So, how do you find out if you have derogatory marks on your credit report, what do they mean, and what can you do about them?
First, you need to pull your credit report from each of the credit reporting agencies. This is a free report you can order annually on AnnualCreditReport.com. Each credit reporting agency handles negative entries differently.
There may be a section labeled “potential negatives,” others may be listed under collections or public records. Some creditors put their statement on the account notes rather than listing it under a separate section.
There are different types of derogatory remarks that you may find on your credit report.
Collections
These are credit accounts that have been sent by the original creditor to a collection agency due to non-payment. In some cases, the original creditor will sell your account to a collection agency for a very small percentage of the total amount owed. Most credit cards and banks wait until you are 120 days late or longer before resorting to sending or selling your account information to a collection agency.
Late Payments
When you make a payment 30 days late, your creditor reports this to the credit bureaus. You may also see late payment listings under 60, 90, and 120+ days.
Bankruptcy
If you have filed bankruptcy recently, you will see this on your credit report for seven to ten years, depending on which type of bankruptcy you filed.
Foreclosure
If you get behind on your mortgage payments, your bank has the right to foreclose on your home. There is no hard and fast rule for when banks start the procedure. Usually, the process begins from three to six months after your first missed payment.
Tax Lien
Tax liens are the result of not paying your taxes. This is a serious derogatory mark as it stays on your credit report until it is paid. It doesn’t fall off in a set number of years unless you pay the debt.
Civil Judgments
Currently, civil judgments don’t appear on consumer credit reports from the major credit bureaus and don’t impact credit scores. But you still owe the debt, and they can still impact your ability to qualify for a loan. If you have a civil judgment on your credit report, you should dispute the entry with each credit bureau by asking them to remove it.
How Can I Get a Derogatory Mark Off My Credit Report?
Short answer:
You can pay any debts that you owe or dispute the derogatory mark if you believe that it is inaccurate.
Long answer:
Derogatory marks affect your ability to get credit and how much your interest rate will be if you do get credit. Lenders see these marks on your credit report and often deny you credit regardless of how much you have improved your accounts.
If you contact your creditors and pay your debts, your credit report will, over time, have fewer derogatory marks, and your credit score will go up.
If you have derogatory marks on your credit report that are not yours or believe to be incorrect, you can dispute them with the credit reporting agency. Each agency has a different process for disputing credit entries.
You can find this information on their respective websites. If you don’t have time to do this, you can hire a professional to handle the negative entries and clean up your report.
What is a Charged-Off Account?
Short answer:
It is an account that is listed under your name that a creditor or lender has written off as a loss. Usually, an account is charged-off due to non-payment.
Long answer:
If you see a charge-off on your credit report and don’t know what it is, think back on your financial history. Have you neglected to pay a medical bill, credit card, or another loan in the past seven years? If you have a legitimate charge-off on your report, the answer is yes.
When you neglect to pay your monthly payments for an extended period of time, typically around six months, the creditor may decide to give up and close the account. This is called a charge-off, and your credit report will show the account as “charged-off.” This allows the creditor to take a loss on their taxes for the bad account.
This charge-off does not mean you don’t owe the money. Once the creditor closes the account, it is normally sold to a collection agency for mere pennies on the dollar. However, you are still responsible for that debt, and it will show up as collections on your credit report.
Avoiding this is as simple as not over-extending yourself financially, staying in touch with your creditors when you have financial difficulties, and making your payments. In this case, even a late payment is better than a charge-off.
How Long Do Collections Stay On Your Credit Report?
Short answer:
Seven years.
Long answer:
Collection accounts are derogatory marks on your credit that are the result of non-payment of financial obligations. When you neglect your payments for six months or more, your creditors may decide to take a loss and mark your account as a charge-off.
At this point, the account is sold to a collection agency and your report reflects this change by marking the account as “in collections”. The item will stay on your credit report for seven years from the date of your last payment made to the original creditor.
Once one of your accounts is in collections, you have the option to pay off the debt or dispute the information reported if you believe that it is inaccurate or untrue.
While it does look good to lenders when you pay your collection accounts, payment does not necessarily mean that the negative entry will be removed. Often, the entry stays but has a note indicating it was paid.
How Long Do Hard Inquiries Stay On Your Credit Report?
Short answer:
Two years.
Long answer:
Hard inquiries are credit inquiries from potential lenders used to decide for loans, credit reports, and other financial matters involving credit. These stay on your credit file for two years but only affect your score for one year.
Unlike soft inquiries, you almost always have to give permission for these entities to do a hard pull. You can explicitly ask that they not do a hard pull.
Hard inquiries have a negative impact on your credit score. These inquiries can lower your credit score. Every hard pull can reduce your score by up to five points, although it is typically on the low end of the spectrum.
However, if you are credit shopping – applying for multiple loans and credit cards – your score can take a serious hit. This is seen as reckless and desperate behavior.
The one exception to this rule is when you are comparing lenders in order to make a financial decision. Multiple applications to the same type of lender during the same time frame are weighed as one inquiry, not multiple.
For example, you are buying a house, and you apply for mortgage loans with multiple banks to see who has the best interest rate and terms. This would only be considered one hard pull.
Hard inquiries are not going to break the bank; however, if you are working to raise your credit score, every point counts. Avoid applying for credit when it’s not necessary.
How Long Does a Foreclosure Stay On Your Credit Report?
Short answer:
Seven years.
Long answer:
Foreclosure, like many other derogatory marks, stays on your credit report for seven years. This happens when you get behind on your mortgage payments, and the bank decides it has no option but to take the house back and try to get some of its money back by selling it.
How Does Foreclosure Happen?
This does not happen overnight. One missed payment doesn’t cause you to lose your house. If you don’t get the payments under control, one missed payment becomes two, then three, and before you know it, you are sinking in debt.
If you haven’t stayed in touch with your mortgage company and worked out a way to get on track, the next thing you will get is a notice of default.
Foreclosure is a double whammy to your credit report and your credit score. Your mortgage company will have reported your missed (and late) payments, and now you will have a foreclosure on your file.
Even though the foreclosure will drop off your credit report in seven years, those seven years will be tough in the credit world. A foreclosure is one of the most detrimental marks that can be on your credit file. Your credit score will drop dramatically.
How To Avoid Foreclosure
If you find yourself in a tight financial situation and know you will have trouble making your mortgage payment or that it is going to be late, contact your lender immediately. Communication goes a long way in preventing foreclosure.
Lenders would prefer to work with you so that you can keep your home rather than lose money through the foreclosure process. Communication shows good faith and responsibility.
It shows that you aren’t running and hiding from your debt and that you want to find a way to get caught up. This goes a long way in avoiding foreclosure and damaging your credit score.
How Long Will a Bankruptcy Stay On Your Credit Report?
Short answer:
Seven to ten years.
Long answer:
Bankruptcy can impact your ability to get credit for seven to ten years, depending on the type of bankruptcy you file and how hard you work at recovering financially after the bankruptcy.
Filing for Chapter 7 or Chapter 13 bankruptcy should only be done if you have no other options and simply cannot see a way out of your financial nightmare. If this does become necessary, you need to look at both types of bankruptcy and choose the one that best fits your situation.
Chapter 7 is the most detrimental. It remains with your credit file for ten years. This type of bankruptcy eradicates your unsecured debt. This includes credit cards, medical bills, and personal loans that are not secured.
Chapter 7 Bankruptcy
You can only file Chapter 7 if you fall under the income levels set by federal law. If you qualify to file Chapter 7, the court will appoint a trustee to oversee your case. All of your property that is considered non-exempt is sold off.
Exempt property lists may change occasionally but typically include your home and car, personal clothing, and household furnishings. However, the court decides what is reasonably necessary when considering what you can keep and what must be sold. Your 63″ flat screen television is probably not reasonably necessary.
The funds from selling off the non-exempt property will be used to pay back your creditors. Any remaining debt is declared void, and the creditors are simply not paid and cannot sue you for payment. The proceedings are entered on your credit report and stay for a full ten years.
Chapter 13 Bankruptcy
Chapter 13 is also bankruptcy but slightly less harsh. It stays on your credit report for seven years. This is a reorganization plan that is designed for people who have some money left monthly after paying necessary living expenses that can be used to pay off debt.
Your creditors work with the court or appointed overseer to formulate a repayment plan. The repayment process may take several years to complete. However, as the debts are paid, your credit report will begin to show some improvement.
Moving Forward After Bankruptcy
Regardless of how long the bankruptcy stays on your credit, your goal should be to repair your credit once you file. It takes time and patience, but it can be done.
In the case of Chapter 7, you are literally starting with less than zero credit, you not only have no credit, and you have severe derogatory marks on your file.
Start with a secured credit card or department store credit card. You may have trouble getting one initially, but as a little time passes, you should be able to get the secured card. This is your money being deposited with a creditor in exchange for a credit card with the equivalent amount available as credit.
As you use the card and make payments, your credit file will be updated. Your score will change. It won’t happen overnight, but it can be improved. Bankruptcy should always be a last resort, not a frivolous option.
How Long Will a Late Payment Stay On Your Credit Report?
Short answer:
Up to seven years.
Long answer:
Late payments stay on your credit report for up to seven years. When you pull your credit report, you will see your accounts listed individually, depending on the bureau.
On some reports, each creditor will have your payment history recorded. Many creditors list your history month by month with a timeframe showing when you paid, either on time, 30, 60, 90, or 120+ days late.
If a potential lender goes beyond looking at your credit score and looks at your report, one or two late payments might not be serious, especially if they are months or years apart. However, consistent history of late payments is usually a cause for concern. A history of late payment is very damaging to your credit score.
Payment history accounts for 35 percent of your overall credit score. That’s almost 300 points of 850 points. Your payment history is a gauge of your fiscal responsibility. If you can’t manage your money well enough to pay your obligations on time, why would a new lender want to extend your credit?
The bottom line is not how long it takes for late payments to drop off your credit report; the bottom line should be don’t let delinquent payments make it to your credit report.
Conclusion
These and other credit questions will benefit you and your finances. A good understanding of your credit report is essential in maintaining a healthy credit score that can open many doors for you and your family.
