In this blog post, we detail how your FICO score may jump 30 points if you had a tax lien or civil judgment on your credit report. But this has deeper implications affecting everyone trying to borrow funds. Read on to learn how.
Recent News Affecting Your Credit Score
In July of 2017, the National Consumer Assistance Plan (NCAP) called for the three major credit reporting agencies, Experian, Equifax and Transunion to remove most civil judgments and tax liens from their consumer reporting databases. You may ask, what does this actually mean?
Expert risk management services like LexisNexis predict that this change could raise FICO scores as much as 30 points for some consumers. For the 9-11% of US consumers with tax liens or civil judgments on their credit reports, the possibility of any score increase sounds great. And when it’s a 10-30 point bump, that can seem almost too great.
This change could raise FICO scores for consumers with tax liens or civil judgments.
Too good to be true?
LexisNexis is all about facts and figures. They’re the keeper of more data than all three credit bureaus combined. They provide risk management and computer-assisted legal research to businesses across the globe. They’ve been around for over 50 years and boasted the world’s largest legal and public-records database in 2006.
We asked, “Will removing tax liens and civil judgments from credit bureaus increase FICO scores by up to 30 points for some?” They detailed several variables to consider:
Many with weak credit and negatively impacted scores due to their tax liens or civil judgments will likely see an increase. This increase is more likely if the remainder of their credit is clean and without delinquencies.
If you have weak credit, there are ways to continue to improve your FICO score.
However, consumers with strong credit will likely see little or no increase to their scores. To learn how to increase your credit score for a report that lenders will love, check out the following blog: 5 Factors that Will Make or Break Your Personal Credit Score.
Lenders’ Opinions on these Changes:
This is where the hit comes for everyone. If you’ve been wondering, “I don’t have tax liens or judgments, why should I care?” Read on.
Mortgage and commercial lenders’ reactions are important because they affect everyone who is looking to borrow. Lenders use credit reports and FICO scores to determine creditworthiness. Most credit reports are divided into multiple areas. These include real estate, installment debt (auto, student loans, and credit lines) and unsecured debt (revolving credit cards).
Lenders use credit reports and FICO scores to determine creditworthiness.
Before July 2017, when lenders checked reports for creditworthiness, they would call the public records area the ‘red flag area’. This red flag area contained tax liens, civil judgments, and bankruptcies – the very items being taken out of question now. LexisNexis says that mortgage borrowers who have a judgment or tax lien are 5.5 times more likely to go into pre-foreclosure or foreclosure. Before July 2017, this red flag area helped confirm the borrower’s inability to pay back debt.
Now, the removal of this information decreases lenders’ ability to fully assess a borrower’s creditworthiness. In the future, to protect themselves from what they see as inevitable loss, lenders may increase interest rates for all borrowers.
In the future, to protect themselves from ‘inevitable loss’, lenders may increase interest rates for all.
This means that everyone will likely see an increase in rates. Even if you’ve never had a civil judgment, and even if your credit score remains flawless, you’re included. You will likely see a slight increase in consumer and commercial rates due to the overall increased risk to lenders.
The Good News
Credit experts saw this coming. Brian Riley, director of the Mercator Advisory Group, predicts that mortgage and commercial lenders will turn to additional due diligence.
Last May, LexisNexis announced that they were already prepping a new report to address this point of concern. Amerifund and other commercial finance institutions have been using additional due diligence information sources for years.
This is why it’s important to cover all of your bases when starting a business and planning for business credit. Ensuring you have the correct business structure and legal documents prior to applying for a business loan can save you on rate, time, and stress when you need it most.
Having the correct business structure and legal documents prior to applying for a loan can save you on rate, time, & stress when you need it most.
Plan for success with our free Comprehensive Business Start-Up Checklist below. We hope this saves you time and stress by feeling more prepared. And as always, feel free to reach out to us with any questions you may have.