The three credit reporting agencies (Equifax, Experian and Equifax), under a program called the National Consumer Assistance Plan (NCAP) are looking for ways to improve their methods of collecting, reporting and updating data related to public records. Though the rulemaking is not final, the conventional wisdom is that there will be a decrease in the number of tax liens and public record judgements that will be included on individual consumers’ credit profiles. The impact could be substantial, as more than half of such data could be left off public records.
As many as 7 percent of consumers in the United States have civil judgements on their credit profiles, with 3 percent subject to tax liens; less than 1 percent of U.S. consumers have both on their record.
That begs the question: How to measure credit risk when the available and included data is limited? Tax-lien and civil-judgement data are highly predictive of default risk, and traditional models lose their predictive power, said VantageScore. One advantage accrues to the consumer, with a credit profile likely to improve with the absence of such judgements thrown into the risk scoring mix.
VantageScore said it gauged the impact of a maximum-impact scenario, in which all tax liens and civil judgements were removed from credit files. The analysis looked at a random sampling of 4 million consumers, culled from the Experian database. Under the extreme scenario in which all liens and judgements were removed, VantageScore found that credit files for 11 percent of the sample population were affected, and 8 percent of the population saw changes in their credit scores, with the average change being an increase of 11 points. And for the VantageScore 3.0 model, predictive accuracy dropped “only minimally,” the company said, and rank-ordering, the listing of consumers sequentially, according to relative default risk, remained in “highly effective.”
The overall result, using the VantageScore model, is one where 8 percent of the population saw a boost in the wake of removing all liens and judgements. The majority of changes, said the firm, took place among consumers with scores in the lower reaches of VantageScore 3.0’s score range of 300-850, particularly 350 to 600; in this subset of the test sample, the impact of boosting credit scores absent the liens/judgements becomes palpable, with a 10-percent improvement in scores.