As the calendar flips to July, you may have more to look forward to than fireworks and Independence Day celebrations. Millions of Americans are poised to see a pop in their credit scores of anywhere from about 10 to over 40 points.
This is all thanks to a little-known policy change having to do with tax liens and civil judgments. A tax lien is a legal claim the government has over your assets if you fail to pay your taxes. Civil judgments are similar, but they’re payments ordered by the courts in settlements. As things stand now, both negatively affect people’s credit scores. However, beginning July 1 the nation’s three major credit bureaus—Equifax, Experian and Transunion—will wipe about half of tax liens and most civil judgments data from consumers’ files.
Why Is This Happening?
Essentially because a lot of this lien and judgment data is wrong. The change, part of the Consumer Financial Protection Bureau’s “National Consumer Assistance Plan,” stems from a class-action lawsuit brought against attorneys general in 31 states.
The plaintiffs alleged something called “mislinking” of data—essentially when someone else’s info ends up on your report—leads to unfair credit score deductions. So for example, if someone who happens to have the same name as you has a terrible credit history, that could end up damaging your credit score, too. The suit also addressed the alleged difficulty of getting these types of errors fixed.
A tax lien is a legal claim the government has over your assets if you fail to pay your taxes. Civil judgments are similar, but they’re payments ordered by the courts in settlements.
As of July, tax liens and civil debts will be excluded if they do not include sufficient personal identifying information: name, address, and either social security number or date of birth. The bureaus also have to be willing to re-verify the data every six months under the new agreement.
Winners and Losers
A lucky five percent of Americans will have tax liens and civil judgments wiped from their files. Some of them will see bumps in their credit scores, making it easier for them to get loans, credit cards and mortgages. Those affected will see their credit scores increase about 10-20 points, according to a FICO analysis. However, a small group could see their scores increase 40 points or even more.
Related
Lenders, on the other hand, may be worried—they rely on credit-reporting agencies to help them set credit card limits and evaluate applications for loans and mortgages. Once the changes hit, certain credit blemishes won’t be reported, meaning people may appear more credit-worthy than they are. That means people with high likelihoods of defaulting could be placed in loan programs that—given a fuller picture of their credit history—they would not qualify for, says LexisNexis Risk Solutions manager Nick Larson. People with tax liens are twice as likely to default on credit, and more than five times more likely to default on a mortgage, according to a study done by the group.
If you notice a positive change in your credit report, it’s fairly likely your credit score is going to increase — and it may be time to apply for that loan you’ve been holding off on.
As for the rest of us? It’s a toss-up. Larson says that, in the bigger picture, interest rates could increase across the board since lenders won’t be able to distinguish between people with tax liens and judgments and those without them—meaning more people will begin to default on payments and risk will increase. Credit reporting expert John Ulzheimer, however, says the effect of the change will be far too small to have any real impact on interest rates.
What You Should Be Doing
If you think these changes might pertain to you, Ulzheimer suggests pulling your credit report before July 1st and seeing if you have any tax liens or civil judgments in your file. By law, you have the right to one free credit report every year from each of the credit bureaus from annualcreditreport.com.
Pull your report again later in July and see whether the data is still there (the changes are expected to happen around July first but may take days or even weeks). If you notice a change, it’s fairly likely your credit score is going to increase — and it may be time to apply for that loan you’ve been holding off on.
Still, Ulzheimer warns that the policy change is not a free pass for people with these types of marks on their credit reports. Just because they don’t show up in your credit score doesn’t mean they’ve disappeared—you’ll still need to pay them off or face serious consequences.
“Credit reporting is the least of your problems if you have an outstanding judgment over your head,” he says.
With Ellie Schroeder