Good news is ahead for those suffering from low FICO scores — according to reports this morning, civil judgements and tax liens will by and large be coming off of consumer credit reports. The new policy affects the data used in credit score calculations, so it will impact FICO scores. Since the data will be changed, FICO scores may change as a result. The move is one of the latest to keep negative information weighting down credit scores to a minimum. Great news for buyers — possibly risky news for lenders.
The move comes after years of critiques of the credit agencies for reporting information falsely that has a negative effect on consumer credit.
Equifax, Experian and TransUnion are acting jointly in this matter — and as of July 1, they will be removing tax lien and civil judgment data, according to the Consumer Data Industry Association. The standard for removing that data will be failing to completely list important identifying information like a person's name, address, Social Security number or date of birth. Many liens and judgements do not include all of that data. The change will apply to new tax lien and civil judgment data that are added to credit reports as well as existing data on the reports.
FICO scoring is the dominant consideration in most lending decisions — which makes it something of a shame that several flaws have been revealed in the system in recent memory. According to FTC data (from a report mandated by Congress), one in five consumers have at least one error on one of their three major credit reports. According to the CFPB, the three credit bureaus received around 8 million requests disputing information since 2011. The CFPB also released a study indicating that the three agencies need to improve standards for public records data by using better identity-matching criteria and updating records more frequently.
Inaccurate information on credit reports has the potential to damage more than just consumers’ ability to access credit — housing, and in some cases employment decisions, can also be affected by low scores.
In 2015, the credit-reporting firms reached a settlement with New York's attorney general over several practices — 31 states followed suit. Those settlements with the states forced the firms to remove several negative data sets from reports like non-loan-related items that were sent to collections firms, such as gym memberships, library fines and traffic tickets. By 2018, the credit reporting agencies will also have to remove medical debt collections that have been paid by a patient's insurance company from credit reports by 2018.
The streamlining of credit reports is doubtlessly good news for consumers — but some are wondering if removing tax liens and civil judgements from credit reports will make lenders less able to make accurate underwriting decisions. Consumers with liens or judgments are twice as likely to default on loan payments, according to LexisNexis Risk Solutions.
“It's going to make someone who has poor credit look better than they should,” said John Ulzheimer, a credit specialist and former manager at Experian and credit-score creator FICO. “Just because the lien or judgment information has been removed and someone's score has improved doesn't mean they'll magically become a better credit risk.”
Roughly 12 million U.S. consumers, 6 percent of the total U.S. population who have credit scores will see increases in their FICO score as a result of this change. For most, that will be a modest pickup, worth 20 points or fewer. Scores are projected to rise by at least 40 points for around 700,000 consumers.