How Derogatory Items Affect Your Credit Score

Your credit score serves as an assessment of your credit history to help creditors and lenders reduce their financial risks when lending to you. Derogatory entries on your credit report, such as a bankruptcy or collection account, lower your credit score and lead to lenders charging you higher interest rates on money you borrow -- if they agree to do business with you at all. Derogatory entries influence your credit score differently depending on a variety of factors.

Initial Impact

An identical negative report will damage different consumers' credit scores by varying degrees, depending on the information already present within each individual's credit file. This is because your credit score takes all the financial data within your credit report into consideration. For example, while a foreclosure may drop one consumer's credit score by 150 points, it may cost another consumer only 85 points. In general, the higher your credit score is, the greater the damage you will suffer from a derogatory entry.

Effects Over Time

Your most recent history with debt has the greatest importance to prospective creditors. Because of this, the FICO credit scoring formula -- the one used by many lenders when reviewing consumer credit scores -- places the greatest degree of importance on accounts less than two years old. Provided you practice responsible habits, such as keeping your balances low and making timely payments to your creditors, a derogatory entry will have less of a negative effect on your credit score as the entry ages.

Paid vs. Unpaid

While paying your debts is one method of keeping your credit score from suffering, paying off certain derogatory debts, such as collection accounts, does not positively influence your credit score. Paying off a charge-off that reflects a balance, however, does positively influence your credit score. This is because the credit scoring formula considers the information your original creditor reports more pertinent to your creditworthiness than information reported by a collection agency.

Settling old debts, while admirable, does not erase the debt's status as delinquent. The very act of settling the account updates it on your credit report -- causing the derogatory debt to damage your credit score further.

Reporting Period

The Fair Credit Reporting Act notes that, with the exception of bankruptcies, judgments and tax liens, the credit bureaus must delete derogatory entries from your credit file after seven years. Once the credit bureaus delete a negative entry, it no longer factors into your credit score and lenders do not view evidence of the debt when evaluating your credit report. Although you still technically owe a deleted unpaid debt, it cannot affect your credit rating, nor can the creditor "reinsert" the debt once the federal reporting period passes.