Imagine waking up one morning and finding that some of the most negative information on your credit report was gone.
This may have happened to you on July 1, 2017, due to sweeping changes the Big 3 credit bureaus (Equifax, Experian and TransUnion) are making to their reporting processes for tax liens and judgments.
If a lien or judgment on your report doesn’t meet the following standards, it will vanish from your credit reports:
- The record must have your name, address and either your Social Security number OR date of birth: Inaccurate reporting can cause various mix-ups, including negative information landing on the wrong credit files. So, beginning July 1, if the data regarding your tax lien or judgment doesn’t have the required personal information attributes, “It’s got to go,” says credit expert John Ulzheimer.
- The record of your lien or judgment must be reverified every 90 days: The status of liens and judgments can change, Ulzheimer explains. Liens can be released, and a judgment can be satisfied. If the bureaus can’t commit to reverifying your lien’s or judgment’s status every 90 days, they will likely drop them entirely.
“Reverifying something every 90 days is not cheap,” Ulzheimer says. “It’s a loss for [the bureaus], and there’s no way to recoup the investment. They can’t go out and charge someone for that.”
Which records get dropped may depend on the ease with which they can be verified, and some courthouses make that easier than others. For example, some make records available electronically, while others don’t, Ulzheimer says.
Why things changed
The credit bureaus aren’t dropping negative public-record information from reports to be nice; it’s the result of the recent regulatory environment. In 2015, the credit bureaus reached a multi-state settlement with more than 30 attorneys general. Out of this settlement came the National Consumer Assistance Plan (NCAP) a plan of action that satisfies the settlement’s aims (making the credit-reporting industry more transparent and consumer-friendly, basically).
Simultaneously, the Consumer Financial Protection Bureau (CFPB) has been sounding the alarm about various weaknesses in the consumer-credit reporting industry, particularly personal data inaccuracy.
These factors have created pressure for the bureaus to incorporate the removal of tax liens and judgments into NCAP, if they can’t ascertain their accuracy and reverify them regularly.
How many liens and judgments will be affected?
Not all liens and judgments will disappear from all credit reports – only those that don’t meet the above criteria.
However, per Ulzheimer a lot of these records will indeed vanish. Millions of credit reports have liens and judgments on them, he says. And the new standards will likely expunge 50 percent of liens from credit reports and virtually all of judgments, based on what he’s heard from the industry.
What it means for consumers, the industry
For consumers, the news is good.
“The knee-jerk reaction is, ‘How great is this for consumers?’” Ulzheimer says. “And it is. The consumer who has a lien and a judgment is basically going to wake up one morning in July and that information is probably going to be gone. Their credit score is going to go up as a result, and it may go up a lot.”
Tax liens and judgements are a drag on credit scores. So, if you don’t have other negative information on your credit report (such as delinquent credit cards and loans), you can expect a nice lift. FICO, for its part, estimates that most consumers who get a boost will see a modest improvement of under 20 points on average. Even a modest bump, however, could take you from, say, bad to fair credit – which could qualify you for more credit products.
The good news ends, however, when you look at it from the credit-reporting and lending industries’ perspectives.
“There’s a reason why judgements and liens have been on credit reports for more than three decades,” Ulzheimer says. “It’s valuable information.”
And the ripples of these changes will be felt throughout the reporting and lending industries. For credit bureaus, removing these pubic records “dilutes the value of their core product,” Ulzheimer says. Scoring models (like FICO and VantageScore), will have to adjust their algorithms. Lenders will have to figure out how they’re going to assess risk.
Even consumers shouldn’t get “tunnel vision” while celebrating what must seem like a godsend, Ulzheimer warns. Liens and judgments will still exist, even if they’re not on your credit reports. And so will the legal ramifications of not paying them. A lender might still search public records before approving you, at which point they’d discover any liens and judgments. And removal of these negative accounts from your credit reports may be only temporary.
“If the bureaus figure out a way to get the information and verify it every 90 days, there’s nothing to say they can’t put it right back on the credit report,” Ulzheimer says.