Beginning on July 1st, the three major credit bureaus, TransUnion, Experian and Equifax, will no longer report tax liens or civil judgments with incomplete information on individuals’ credit reports. These changes, brought on by pressure from consumer advocacy groups and government officials, are designed to improve the accuracy of your credit report and will affect about 12 million people.
These reports, stemming from public databases, have an alarming number of inaccuracies. Consequently, credit reporting bureaus may no longer use this information if they do not include the correct name, address, and social security number or date of birth. This incorrect reporting has negatively affected about 7% of the 220 million Americans that currently have a credit report.
As a result of this change, some people will see an increase of their credit score as high as 40 to 60 points or more.
The vast majority of consumers whose credit scores are currently affected by tax liens and civil judgments will only see an increase of 20 points or less. While this increase may not seem like much, it can make a big difference.
Most credit scores range between 300-850 points. Most lenders prefer a score over 640 points in order to consider you for a loan, a mortgage or other line of credit. If you’re on the cusp, a 20 to 60 point difference can be the difference between buying that new house or renting for a few more years.
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Are credit reports always accurate?
From your ability to buy a home or rent an apartment, to your ability to obtain a credit card or get a favorable interest rate, maintaining a good credit score is vital. It’s important to regularly check your credit report with TransUnion, Experian and Equifax to ensure that their reporting is accurate.
As new research supporting this recent change indicates, information used by credit bureaus can be incomplete or even incorrect. In 2012, the Federal Trade Commission (FTC) concluded in a study that one in five consumers had an error that was corrected, after being reported, by either TransUnion, Experian or Equifax.
Four out of five consumers saw some change to their credit report after filing a complaint. Credit scoring companies like FICO and VantageScore, which is owned by the three major credit bureaus, use detailed analytics and computer algorithms to determine your creditworthiness.
When this information is incorrect, you are usually required to file a complaint with the credit reporting company. Once a complaint is filed, the agency has 30 days to resolve it.
If the information is determined to be incorrect or cannot be verified they are required by law to remove it or change it. However, due to the new changes regarding tax liens and civil judgments, no action is required on your part, unless in a rare case where all of the identifying information is correct.
What are tax liens and civil judgments?
When you fail to pay taxes, the government can impose a lien on your personal property to try and extract payment from you. Tax liens can be levied against individuals and businesses by federal, state, or local governments.
A federal tax lien is the government’s legal claim that you have failed to pay your federal tax debt and are usually instigated by the IRS. Liens can be used to seize property such as your car, house, and investment accounts. Historically, it’s been in to qualify for any type of credit with an outstanding lien on your credit report.
A civil judgment is a ruling against you in a non-criminal court case, usually including a payment of damages. These judgments are made by a court following a lawsuit where you either failed to appear or were unsuccessful in defending.
These lawsuits can be for any number of reasons, which may not even have anything to do with your creditworthiness. All it means is that a judge or a jury has determined that you are legally responsible for damages to a plaintiff.
Up until this point, a tax lien will typically stay on your credit report for seven years if it has been paid and 15 years if it is unpaid. A civil judgment would stay on your credit report for only seven years. While these standards still apply, these derogatory items won’t stay on most people’s credit reports due to poor reporting.
Will your credit score go up?
FICO’s study on the outcome of these changes found that around 93% of credit reports have no liens or judgments against them. But the remaining 7% should see varying degrees of improvement. The majority, about 10 to 12 million people, can expect a modest increase of 1 to 19 points.
The numbers are a bit better for 1 to 2 million people who can expect a 20 to 39 point increase. While in the minority, 300,000 people can expect a significant increase of 40 to 60 points just from having these liens and judgments removed from their credit reports.
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Your credit score is based on many factors, so removing this information from your credit report may not help everyone equally. For instance, if you owed back taxes on your home and failed to make (or were late) on your payments to your lender, those will show up on your credit report separately. This information will not be removed.
Individuals with tax liens and civil judgments are more likely to have other blemishes on their credit score. In addition, though some people will see an increase, some may see a decrease in their credit score.
Credit reporting companies do not measure everyone equally and you may be put in a different bracket and with that may come a change to metrics used to score them.
While the rules change goes into effect on July 1st, TransUnion, Experian, and Equifax anticipate that it will take several weeks for them to fully take effect. If you don’t see a change immediately, have some patience, good results may still come.
Can tax liens and judgments still affect your ability to get credit?
While your credit score may go up, don’t get too excited that you don’t have to worry about tax liens and judgments affecting your creditworthiness in other ways. Creditors can still seek out this information elsewhere and use it against you.
Other companies, such as LexisNexis, also scour public information and now they’re hoping to cash in on the void left by the lack of information on your credit report. And they’re in a great position to do it.
Who exactly is LexisNexis? In the 1970s, the company created the first searchable computer database of legal findings. In 1980, they completed hand keying the entirety of U.S. federal and state cases into their system. Throughout the 80s, they created searchable databases for journalistic news articles.
Then, with the purchase of RiskWise in 2000, LexisNexis got in the business of risk management, providing information to banks and other lending institutions to determine the creditworthiness of their clients. They’ve now partnered with CBCInnovis to repurpose or repackage this information and sell it directly to lenders.
According to LexisNexis Risk Solutions, this new “RiskView Liens & Judgments Report” delivers technology advancements that bolster the reliability of lien and civil judgment content. It also boasts greater than 99% reliability and full compliance with Fair Credit Reporting Act regulations.
This may be true, but remember that FICO, VantageScore, Equifax, Experian, and TransUnion have all agreed that this information is often faulty, incorrect, or incomplete. It’s unclear exactly what financial institutions the RiskView Liens & Judgments Report will be marketed to, but CBCInnovis and LexisNexis believe they are filling a void.
What does the future hold?
While most credit reporting companies realize tax lien and judgment data is flawed, they still believe that accurate information is predictive of financial risk. This, along with dozens of other factors, can negatively impact your ability to buy a car, rent an apartment, or get a credit card.
The rule changes removing tax liens and civil judgments from your credit report are a good step, but it is still necessary to monitor your credit diligently. Federal law requires Experian, Equifax, and TransUnion to provide your credit report to you free of charge once per year available at annualcreditreport.com.
They are not required to give you your credit score though you can purchase that information from them and other agencies for a fee, usually ranging from $7 to $12. This will typically be your FICO score though you may also want to purchase your VantageScore as well.
You can then get a clear picture of what a lender sees when determining your risk to them. You’ll also be able to see if the removal of a tax lien or civil judgment has positively affected your credit scores.
The complex nature of financial reporting can be daunting at best and maddening at worst. If you think your credit report or credit score contains errors and you are unable to fix them yourself, it’s a good time to call in the professionals.
You shouldn’t have to figure out financial laws and credit reporting rules all on your own. There are several well-regarded legal teams ready to help you fix your credit beyond the removal of tax liens and civil judgments. It’s especially true if you don’t see them disappear from your credit report within the next several weeks.
Check out some of the best professional credit repair firms in the business.