On April 16, big changes took effect to the way debt is reported for some US consumers. At face value, these changes seem to affect only a small percentage of consumers, but stick around, we’re taking a deeper dive into what these changes could mean for you. In July of 2017, the National Consumer Assistance Plan (NCAP) called for the three major credit reporting agencies, Experian, Equifax and Transunion to begin removing most civil judgments and the majority of tax liens from their consumer reporting databases.Those who don’t have tax liens or civil judgments may write this piece of news off. Others may take this as the good news for which they’ve been waiting for. And with good reason, 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, let alone a 10-30 point bump, certainly sounds great, almost too great.
Will removing tax liens and civil judgments from credit bureaus increase FICO scores by up to 30 points for some?
Is it 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 nearly 50 years and as of 2006 boasted the world’s largest electronic database for legal and public-records. Will removing tax liens and civil judgments from credit bureaus increase FICO scores by up to 30 points for some? Possibly, but there are several other variables to consider. Many with weak credit and negatively impacted scores due to their tax liens or civil judgments will likely see an increase in their FICO 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. The removal of tax liens and civil judgments will likely increase your credit score. However, consumers with strong credit will likely see little or no increase to their scores. To learn more about how to increase your credit score and maintain a report that lenders will love, check out our blog on 5 Factors that Will Make or Break Your Personal Credit Score.
If you have weak credit, there are ways to continue to improve your FICO score.
What do the lenders have to say?
When it comes to credit, it doesn’t really matter what LexisNexis or NCAP has to say about it. What matters is what mortgage and commercial lenders have to say. This is where the hit comes for the rest of us. If you’ve been wondering, “I don’t have tax liens or judgments, why should I care?” Read on. Lenders use credit reports and FICO scores to determine creditworthiness. Most credit reports are divided into multiple areas including real estate, installment debt (auto, student loans, and credit lines) and unsecured debt (revolving credit cards).
Before July 2017, the next part which no lender wanted to see when scrolling through a report to check creditworthiness contained public records (tax liens, civil judgments, and bankruptcies). For a lender, it’s the red flag area. LexisNexis finds mortgage borrowers that have a judgment or tax lien are 5.5 times more likely to go into pre-foreclosure or foreclosure. It once gave further confirmation of the borrower’s inability to pay back debt. Here’s the kicker, the removal of this information decreases the lenders’ ability to fully assess a borrower’s creditworthiness.
In the future, to protect themselves from what they see as inevitable loss, lenders may wind up increasing interest rates, if only marginally, across the board for all borrowers. This means that even if you’ve never had a tax lien or civil judgment and even if your credit score remains flawless, you will likely see a slight increase in consumer and commercial rates due to the overall increased risk to lenders.
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.
The Good News
Credit experts saw this coming. Brian Riley, director of the Mercator Advisory Group, a credit advisory service, predicts that mortgage and commercial lenders will turn to additional due diligence in the future, like checking with LexisNexis, in addition to the three credit bureaus. Last May, LexisNexis announced that they were already prepping a new report to address this point of concern for any lender who makes the request. 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.