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This April, the three major credit reporting bureaus decided to engage in some spring cleaning by removing all tax-lien data from credit reports. This action could result in your credit score receiving a welcome boost, should your credit report be one of the 5.5 million with a lien in its history.
Equifax, Experian and TransUnion announced that after April 16 of this year, any and all tax liens individuals would no longer show on credit reports. The reason for the change lies with a settlement the major credit bureaus made in 2015 with 31 state attorneys general, where the bureaus agreed to adopt more stringent policies with regard to credit reporting and the amount of information needed to link tax liens and civil judgments to individuals. The new regulations set in place by the credit bureaus required public records associating individuals with civil judgments or tax liens to include the individual's name, address, Social Security number and date of birth. In addition, all of this information needed to be refreshed every 90 days in order to meet the new standards and be included in credit reports.
Previous cases of people sharing the same name or address would sometimes lead to a tax lien or civil judgment mistakenly appearing on the wrong person's credit report, and the bureaus attempted to rectify the problem last July when they expunged 50 percent of tax lien data (and 96 percent of the data concerning civil judgments) from their records for not meeting the new standards.
Now the credit bureaus have decided to discount the remaining tax lien data and remove it from credit reports, meaning some individuals could see as much as a 30-point boost to their FICO scores, according to LexisNexis Risk Solutions. But a report by the Consumer Financial Protection Bureau report (CFPB) claims consumers affected by the removal of civil judgments or tax liens on their records will see a zero to-15 point increase in their credit scores. Since consumers with liens or civil judgments on their records have an average credit score of 577 (according to the CFPB report), that boost could be the difference between qualifying for a 3.5% down payment on a Federal Housing Administration loan (which requires a score of 580 or above) and having to put down a whopping 10% down payment (for anyone with a score less than 580).
While that's good news for people who have negative tax lien or civil judgment records weighing down their credit scores, lenders lose information that potentially helps them assess the creditworthiness of an individual. Both FICO and VantageScore, the developers of the two most common credit scores, maintain the removal doesn't harm the overall efficiency of their models.
"Under a maximum-impact scenario where all liens and judgments are removed from consumer credit files, the VantageScore 3.0 model's predictive performance drops only minimally," according to a 2016 report from VantageScore.
FICO reached a similar conclusion in a 2017 report, citing that consumers with tax liens are "very likely to have additional derogatory information on their credit file and therefore tend to score relatively low, even after the public record data in question has been removed."
Given the above information, consumers in the market for a loan may want to monitor their credit score in the next few months to see if it's affected by the removal of tax liens. They may be pleasantly surprised.
The article, Why the Credit Bureaus May have Just Raised Your Score , originally appeared on ValuePenguin.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
