In a NutshellThree major credit bureaus have removed many civil judgements and tax liens from consumer credit reports, resulting in credit score increases for some.
The three major national consumer credit bureaus — Equifax, TransUnion and Experian — estimate that about half of all tax liens and nearly all civil judgements have been removed from consumers’ credit reports as of July 1.
The change is a part of the National Consumer Assistance Plan, which is a result of discussions and an agreement between the three major credit bureaus and 31 state attorneys general reached in 2015.
The NCAP includes a series of actions and policy changes that are intended to improve credit reporting data accuracy, quality and consumer credit education.
Tax liens and civil judgements on your reports can lower your credit scores, so the removal of this information from credit reports could lead to an increase in scores — for some.
Other credit report changes include prohibiting adding medical debt to credit reports until at least 180 days after the account is reported to the credit reporting agency and the removal of previously reported medical collections that have been or are being paid by insurance.
The NCAP requires new and existing public record data to meet certain criteria in order for them to appear on your consumer credit reports, including:
- The public record data must have your name, address, and either your Social Security number or your date of birth.
- The data furnisher of the public record information must visit the applicable courthouse at least once every 90 days to obtain newly filed and updated public records.
The enhanced public record data standards apply to new and existing bankruptcies, tax liens and civil judgement data in consumer credit reporting databases.
If you have a bankruptcy, your credit may not be affected by these changes, but the bureaus anticipate that over 95 percent of civil judgement records and over half of tax lien records don’t meet the enhanced data requirements.
As a result, Experian, Equifax and TransUnion will no longer include the noncomplying tax liens and civil judgements on their consumer credit reports.
Once the credit bureaus remove this information, you may see your credit scores increase.
But don’t necessarily expect a huge jump.
The average score increase will be modest
Both TransUnion and Equifax found that about 9 percent of people in the national consumer credit databases have either a tax lien or judgement reported on their credit file.
That’s about 19.8 million people who could be affected by the change.
Two of the biggest credit scoring models in the United States, FICO and VantageScore, both analyzed credit files to see how the changes might affect consumers.
FICO ran a study based on a national representative random sample of about 10 million credit files from each credit reporting agency. It used information from the credit bureaus to distinguish between public records that will and won’t be removed.
The study found that 6 to 7 percent of the people who FICO can score had a judgement or tax lien removed from their file as a result of the enhanced public record standards.
FICO also found that the same people tend to have other derogatory information on their credit file, which can lead to low credit scores even if tax liens and judgements aren’t included.
Other results from the study show that:
- Over 75 percent of people impacted may see their scores increase by fewer than 20 points.
- 5 percent to 1 percent (depending on the underlying credit report) could have a FICO Score 9 increase of 20 to 39 points.
- About 0.2 percent of people who have a FICO Score 9 may see their scores increase by 60 or more points.
VantageScore ran a similar study using its VantageScore 3.0 credit-scoring model to analyze credit files of 4 million consumers and the impact of removing all tax liens and civil judgements.
It found that just over 8 percent of the people that VantageScore can create a credit score for would see a change in their VantageScore 3.0 scores. Among that group, there was an average 10 point increase.
Most people who would see a score change had credit scores between 300 and 600 points.
If you’re looking at your VantageScore credit scores, you may see other credit-model-related changes soon. VantageScore is updating its scoring model to VantageScore 4.0, which will be available in fall 2017.
Sarah Davies, senior vice president of analytics, research and product management at VantageScore, says, “(tax) liens aren’t going to carry as significant a penalty in VantageScore 4.0 as in 3.0.”
Remember, the NCAP guidelines are only expected to remove about 50 to 60 percent of tax liens from consumers’ reports.
Consumers who still have a lien on their credit reports after the change may see a score improvement with VantageScore 4.0’s release.
“But it’s not a guarantee,” Davies says. “It depends on what’s in the rest of their credit file.”
Could my score go down because of the change?
FICO’s study found that less than 1 percent of consumers’ FICO score 9 scores will decrease (most often by 1 to 19 points) after the changes take effect. It says that this can happen when a consumer moves into a different scorecard and as a result gets scored based on slightly different criteria.
What if I’ve never had a tax lien or civil judgement?
If you didn’t have a tax lien or civil judgement on your credit reports before, your reports won’t change and there won’t be an effect on your credit scores as a result of these changes.
Lenders may still consider tax liens and civil judgements
A tax lien or civil judgement can still impact you even if it no longer appears on your credit reports or affects your credit scores. This may be particularly true for those trying to get a mortgage.
LexisNexis Risk Solutions, an aggregator and seller of information that commercial organizations, government agencies and nonprofits use to evaluate individuals, businesses and assets, found that mortgage borrowers who have a judgement or tax lien are 5 ½ times more likely to go into pre-foreclosure or foreclosure.
Mortgage lenders, therefore, may still want to see this information when reviewing an application.
For example, Fannie Mae, a government-sponsored organization that buys mortgages from mortgage lenders, requires its approved lenders (the mortgage lenders that you may work with) to follow its selling guide.
The Selling Guide specifies that borrowers must pay off delinquent credit, including judgements and tax liens, at or before closing.
How will mortgage lenders find out? LexisNexis now offers a LexisNexis RiskView Liens & Judgements Report, which was created specifically to fill in the tax lien and judgement information for lenders.
When you apply for a mortgage, the mortgage lender will pull your credit from the big three credit bureaus and could also pull the LexisNexis report and make a decision based on the combined information.
There are several important changes to credit reporting and scoring coming in the next few months. The removal of some tax liens and judgements from credit reports is an important one that may increase some consumers’ credit scores.
However, any score increase will likely be minimal and in rare cases your scores could drop. You can keep an eye on if, when and how these changes affect you by monitoring your credit reports from Equifax and TransUnion for free using Credit Karma.