Sunday, February 19, 2012

What Is a Key Derogatory on Your Credit Report?

Finding a key derogatory on your credit report is no walk in the park. Derogatory information lowers your credit score and makes you a greater risk for lenders. Negative entries generally fall under the heading of public records or collection accounts. Because not all negative reports fall under the category of key derogatories, there seems to be quite a bit of confusion regarding what a key derogatory actually is.

What is a Key Derogatory?

A key derogatory is typically any entry that is both negative and affects your credit scores. You're probably thinking, "But Lee, don't all negative entries affect my credit score?" Surprisingly no, they don't. Let me explain.

A key derogatory is nothing special.
The FICO scoring system is designed to help lenders make the most accurate lending decisions possible. Not all negative information makes you a greater risk for a lender. For example, if your credit report reflects a defaulted credit card debt of $1000, you're automatically a higher risk for any lender. After all, if you defaulted on that debt, you are more likely to default on another debt in the future. By contrast, an unpaid parking ticket for $40 has little – if any – bearing on your debt management skills. It's just as likely that you simply forgot to pay the ticket as it is that you intentionally refused to do so.

Fair Isaac updated its FICO system in 2009 (Yeah, its called FICO '08, but Fair Isaac was a year behind schedule in releasing the update) to better manage derogatory information. Derogatory credit entries for less than $100 have a reduced impact on your credit scores. In some cases (such as the parking ticket mentioned above) these derogatory entries do not impact your credit scores at all. By preventing small and relatively insignificant debts from dragging down your FICO scores, Fair Isaac helps prevent lenders from losing money by refusing to lend to an individual who would be likely to repay what they borrow – plus interest.

Key Derogatory From Experian

Unlike TransUnion and Equifax, Experian has a different method for determining which entries are and are not key derogatories. A negative entry must fall into one of several specific categories for Experian to mark the entry as a key derogatory. A key derogatory from Experian must be one of the following:

  • A government debt, such as an unpaid student loan
  • Term default (defaulting on the payment terms of a contract, such as mortgage default)
  • Bankruptcy
  • Settled debts (this includes short sales)
  • Unpaid claims (collections, etc.)


This encompasses most, but not all, forms of derogatory entries that may appear on your credit report.

Derogatory and "Key Derogatory" are Synonymous

It is up to the individual credit bureau what does and does not constitute a key derogatory. The negative affect on your credit score is the same regardless of how the credit bureau chooses to label the entry. In this regard, a key derogatory is not any different from a standard negative trade line. Should you file a dispute, you can do so regardless of whether the entry is a key derogatory or a run-of-the-mill credit blemish.

The good news here is that you are the only one who can see what is and is not categorized as a key derogatory on your report. The credit reports that lenders pull are structured differently than consumer reports and do not separate negative entries into "derogatory" and "key derogatory" categories.

1 comment: