FICO Forums: Derogatories and Collections

In this blog series, our credit scoring expert, Tom Quinn, answers common credit score and credit-related questions that you have. Post your questions on our Understanding FICO Scoring and General Credit Topics threads on the myFICO® Forums.

What is a “derogatory indicator” and how does it affect my FICO® Scores?

A member of the Forums noticed that the explanation in one of their score factors referenced the term “derogatory indicator” and they wondered what this is.

When an individual doesn’t pay their credit obligation as agreed, the lender can report that negative information in a number of ways. The most obvious scenario is when the individual has missed a payment.  In this case, the payment history segments are populated with the past due status.

Lenders may also report negative payment information through a set of derogatory indicators or comments added to the account.  For example, an individual may work out a special payment plan with their card issuer where they are only required to pay a portion of the total balance owed.  In this case, the lender may report a derogatory indicator of “paying under a partial payment agreement” on that account.  If an individual does not pay his/her car loan, the lender will likely repossess the car and may report “involuntary repossession” on that account.

However, not all lender reported comments are considered negative.  For example, it’s common to see comments of “closed” or “account transferred” reported on accounts.  When developing the scores, FICO evaluates the list of potential comment codes available to determine which should be considered as negative.

In the myFICO credit report display, these indicators and comments can be found in the “Comment Section” of the detailed credit account information.  Be sure to check this Comment Section if the score factor references a derogatory indicator even if you don’t see any missed payment information being reported.

FICO® Scores considers the derogatory indicators as negative, which will likely have a negative effect on a FICO Score.

Does paying a collection effect FICO® Scores?

A member of the Forums wanted to know if paying off an older collection could hurt his FICO® Scores as it may cause the “date reported” to look more recent.

Paying off a collection could cause the score to increase, decrease or have no impact at all.  It depends on the change in the information reported on the collection as well as the other information in the credit report.  For example, this action would likely have a lower positive impact if the individual has a lot of other negative information on his/her credit report. On the other hand, if the collection is the only negative item being reported, paying it off could help to increase the score.

Regarding the specific question about the effects of “date reported” looking more recent — this should not affect the scores as the date fields FICO uses to date a collection in the FICO® Scores shouldn’t be affected by this payment action.

Do you want your questions answered? Join the myFICO® Forums to discuss personal finance topics with your peers.

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Tom Quinn

Tom Quinn is the Vice President of Business Development for myFICO and has over 25 years of experience working with consumers, regulators, and lenders regarding credit related questions and initiatives.