Starting next month, you might notice a boost to your credit score.
Here’s what you need to know.
Credit Score: What’s Changing?
Beginning today, the three major credit bureaus - Experian, Equifax and TransUnion - will exclude tax liens from credit reports. Since tax liens can adversely impact your credit score, their removal could benefit your score.
This follows adjustments from last July in which the three major credit bureaus removed almost all civil judgment data (think: a consumer who owes unpaid money as a result of a civil lawsuit) and about half of tax lien data (think: a consumer owes unpaid taxes) from credit reports.
Today, the remaining tax lien data will be removed. Approximately 5.5 million credit reports are expected to be impacted.
How will your credit score change?
Consumer experts differ on the precise numerical impact as a result of this change. According to LexisNexis Risk Solutions, a credit score could improve by as much as 30 points when tax lien data is removed.
It’s also possible that there is minimal or no impact to your credit score as a result of this change.
Consumers with strong credit likely would see minimal impact to their credit scores with the removal of such data, while consumers with weaker credit could experience a higher impact.
The Consumer Financial Protection Bureau (CFPB) found that when public records for judgments or liens were removed from credit files, credit scores were impacted as follows:
1. 75% remained in the same credit score band
2. 17% moved to a higher credit score band
3. 6% moves to a credit score band of prime or above
4. 66% stayed subprime or deep subprime
What The Change Means
The change in credit reporting comes after the three credit bureaus agreed with 31 state attorneys general that incorrect identifying information (such as the same name) often linked tax liens and civil judgments to the wrong consumer.
Lenders, however, may not be cheering the change. Consumers with unpaid tax debts or civil judgments can pose a higher credit risk because they have not repaid obligations. With this data no longer included, lenders may not be able to assess risk as accurately.
For example, a consumer with a tax lien or civil judgment could appear more creditworthy to a prospective lender. As a result, these changes mostly impact subprime lenders, since their customers, subprime borrowers, are more likely to have outstanding tax or civil judgment obligations.
How To Increase Your Credit Score
Lenders use your credit score as one factor to determine your creditworthiness. Credit scores can be used to decide whether you are approved for a private student loan, personal loan, mortgage or auto loan, for example, and the interest rate you will receive.
FICO credit scores are among the most frequently used credit scores, and range from 350-800 (the higher, the better). A consumer with a credit score of 750 or higher is considered to have excellent credit, while a consumer with a credit score below 600 is considered to have poor credit.
Whether you have a student loan, personal loan, there are proactive steps you can take to increase your credit score. Here is a quick snapshot:
1. Make on-time payments.
2. Don’t skip payments.
3. Manage your credit card utilization (ideally 30% or lower)
4. Pay off outstanding debt or earn more income (or both) to lower your debt-to-income ratio