Many kinds of entries on a credit report can lower your credit score, but some are much more harmful than others. The entries that do the most damage and that tend to keep your score down for extended periods of time are what lenders call derogatory events—or just plain bad ones. (For a refresher on credit reports and how they are organized, see our Anatomy of a Credit Report series.)
Lenders view derogatory credit report entries as evidence of mismanaged debt. That is why credit scoring models typically treat them as grounds for steep, long-lasting score reductions. That is also why you should avoid them at all costs. This four-part series of articles is designed to help you “steer clear” of derogatory events, examining them in detail so you know what to avoid—and what the consequences could be if you don’t. We are covering the three categories of information that can be considered derogatory: The first part examined public records; part two looked at credit report narratives, part three and this final installment look at the somewhat complicated topic of non-performing trade lines—a fancy term used to describe accounts that aren’t being paid as agreed upon.
By John Ulzheimer
The Ulzheimer Group
In this final chapter of our four-part “Steer Clear” series, we’ll examine the codes associated with credit file data that are seldom seen by consumers but are recognized and treated as derogatory by credit scoring systems.
First, some background: Credit report information is shared and reported in a computer language called Metro-2. Like all computer languages, it takes the form of code, which isn’t decipherable to most humans, other than software engineers. Metro-2, which has been around for decades, is less cryptic than some computer languages, and translation is simplified somewhat by the annual publication of a Metro 2 Manual by the Consumer Data Industry Association, an industry trade group. The following is a list of the various codes1 that are often found on credit reports that are considered to be derogatory.
Account status codes: These codes are meant to communicate the current status of an account as of the date it was most recently reported to the credit reporting companies. And while there are many account status codes that are not considered derogatory, the following codes are considered derogatory and may lead to lower credit scores:
Special comment codes. These codes are meant to add context to the reporting of certain accounts. As with account status codes, there are many special comment codes that are not considered to be derogatory, but the following are considered derogatory and could lead to lower credit scores. These codes are reported as long as the condition applies.
Consumer information indicator codes. These codes are meant to communicate a unique condition that applies to the consumer and is only reported on the consumer’s credit file to which it applies. These codes are specific to bankruptcies.
Past-due balances and collection agency reporting. The last remaining credit report entry that could possibly be considered derogatory would be accounts, of any kind, that have a value in the past-due balance field or accounts that are reported as third-party debt collectors.
Regardless what type of account it is, if an account has a past-due balance of any amount, then it is considered to be a derogatory entry. It is very common for past-due accounts to contain the exact amount that’s currently past due, which in the credit reporting world indicates anything that’s a full 30 days, or more, delinquent. Eventually, when the consumer “cures” the account and brings it up to date, the past-due balance will be removed by the creditor.
Finally, if an account goes into default, the creditor may enlist the assistance of a third-party debt collector to help with the collection of the debt. Debt collectors are allowed to report information to the credit reporting companies. When they do so, their “account numbers” with the credit reporting companies indicate their line of business—collection agency. As such, whenever they report someone to the credit reporting companies, that report clearly shows up as a collection-style account, which is always considered to be a derogatory entry.