Did your credit score just go up?!
Quick, go check your credit score. If you’re like millions of Americans, you may see that it’s significantly higher than it was only a few months – or weeks – ago. Even if you haven’t paid off your credit cards, canceled an account you weren’t using, or disputed a mistake on your report, your credit score may have jumped 10, 20, or even 40 points virtually overnight for one reason: the new credit reporting rules on tax liens.
In fact, Experian, Equifax, and Transunion – the three major credit reporting companies – just instituted a new update to their algorithms that changes how they view tax liens, excluding them as a factor from scoring.
The change comes as a coordinated effort of the credit bureaus to improve the fairness and accuracy of their reporting, and especially when it comes to public records. The new scoring model that excludes tax liens is also in response to a report by the Consumer Financial Protection Bureau. After conducting a comprehensive study, the CFPB found that consumer credit reports were habitually filled with incorrect, outdated, or otherwise mistaken information.
The bigger issue is that these errors actually end up dragging down consumer credit scores, by no fault of their own, even if they are not valid. These days, your credit score dictates so much, like what you pay in interest on credit cards, mortgage rates, insurance premiums, cell phone accounts, and impacts important aspects of your life like renting an apartment or even getting a job.
So, to their credit, the Consumer Financial Protection Bureau worked with the credit bureaus to eliminate civil judgment data from credit reports last July. In the next step of this plan, as of April 16, 2018, tax liens were removed as a factor from credit scoring, too.
Who benefits? If you have a tax lien that was reporting on your credit (and sinking your score), then you will most certainly see a significant increase in your credit score now. However, according to the IRS, about 94% of Americans do not have any sort of tax liens reporting on their credit. That means that about 13 million Americans do have tax liens or other civil judgments affecting their credit scores.
But research by LexisNexis Risk Solutions leads floats evidence that the number of people who see a credit score benefit may be higher. Based on their research, about 11% of our population will have a judgment or tax lien removed from their credit file.
No matter what the final count, how high will these consumers see their credit scores rise now that tax liens are dropped from consideration?
“Analyses conducted by the credit reporting agencies and credit score developers FICO and VantageScore show only modest credit scoring impacts,” says Eric Ellman, Senior Vice President of the Consumer Data Industry Association.
Remember that there are many factors that go into the bureaus’ credit scoring algorithms, and each person’s credit file has different items, accounts, and circumstances. But FICO offers a framework of projected credit score increases based on their study of 30 million credit files:
• Most people will only see a credit score increase of 1 to 19 points.
• Between 1 and 2 million consumers will see their score jump up by 20 to 39 points.
• And about 300,000 people will benefit from a score boost of up to 60 points once these tax liens and civil judgments are removed.
However, the vast majority of American consumers won’t see any credit score increase at all because they don’t have tax liens or judgments on their report.
There may even be a downside to those who don’t have these liens or judgments on their report.
“Overall, consumers actually get hurt,” says Nick Larson, business development manager for LexisNexis Risk Solutions, pointing out that banks, creditors, and lenders will have to tighten their guidelines and requirements just to keep the status quo, compensating for this widespread scoring bump. “Lenders and servicers have to hedge for that risk,” Larson reports.
No matter If you have a tax lien or civil judgment or not, the ideal way to maintain a great credit score over the long term is to make your payments on time, keep your balances low, and keep a good mix of seasoned, responsible accounts.
And contact Blue Water Credit if you’d like more information about your tax liens or how to improve your credit score and save money!
