Severely negative information such as tax liens, judgments and collection accounts can hurt credit scores for years to come. If your credit reports contain items like that, you no doubt wish they would disappear. Your wish may be about to come true.
Under a program called the National Consumer Assistance Plan, the three major national credit reporting agencies — Equifax, Experian and TransUnion — will make important changes to credit report data. These changes may impact millions of consumers.
As of July 1, 2017, the following negative information will be removed:
- Approximately 96% of civil judgments
- About half of all tax liens
FICO estimates 6% to 7% of consumer credit reports that have a FICO score will be affected by these changes. That’s roughly 12 million consumers.
The impact may be even greater for business owners who tend to rely heavily on personal credit. Nav’s research, for example, found that 17.5% of small business owners with a Nav account have either a civil judgment or a tax lien on their personal credit report. (You can check your full business credit profile, including your personal credit score, for free on Nav.com.)
“This change may help more entrepreneurs build a business that sustains,” says Levi King, co-founder and CEO of Nav. “Millions of American small business owners have personal credit scores that fall below prime. A 10- to 20-point increase can mean the difference between qualifying for traditional business financing — with lower rates — or being stuck using higher-cost products that can be more difficult to pay back.”
Your Credit Scores May Increase — or Not: 3 Potential Scenarios
While it would be reasonable to assume your credit scores would increase if this type of information was no longer reported, some consumers may be in for a surprise. It’s possible that credit scores won’t improve, and can even decrease. Here’s what can happen and why.
1. Your Scores Stay the Same
If your credit report contains a number of derogatory items such as collection accounts, multiple late payments etc., it’s possible that the removal of this information won’t make a difference in your scores. According to a research brief by credit scoring firm FICO, about 92% of consumers’ credit reports had other negative information on their credit reports, and that information can keep scores from rising when judgments or tax liens are removed. The report also notes, “Characteristics based on non-public record data such as credit accounts have a substantially larger influence on the FICO® Score than characteristics based on public records.”
Just because your credit scores don’t see an immediate impact, however, doesn’t mean the removal of the lien or judgment isn’t a net positive. If other negative items on your report eventually age off or are removed, you could see a boost down the road if new negative items don’t make their way onto your report in the meantime.
2. Your Scores Rise
The majority of consumers who have this negative information removed from their credit files will see an increase of 20 points or less. Some consumers may see a larger jump if their credit report has few additional negative items, though this group is quite small, according to FICO’s analysis. If you are lucky enough to be in that small group that sees a jump of 20 points or more, that’s a credit score increase large enough to have a significant impact on whether you could be approved or denied for a loan and what interest rate you could qualify for, depending on where your scores are currently.
3. Your Scores Decrease
It’s not likely, but it is possible for a credit score to go down after negative information is removed. This usually happens when there is not much other credit data on the report, or because reports may be segmented into groups where they are compared to other consumers with similar characteristics. The removal of negative information may result in the report being compared to a different set of consumers or may leave too little scoreable credit data. FICO said the first scenario occurred in less than 1% of the files they studied, and the second scenario did not occur at all.
Gone But Not Forgotten
While this all sounds like good news for consumers with these problems, there is a downside. In the past, some consumers discovered judgments by checking their credit reports. (In case you’re wondering how someone could have a judgment against them and not know, it happens all the time. If the consumer does not respond to a lawsuit, the creditor may be able to obtain a default judgment. Sometimes consumers aren’t even aware they are being sued if, for example, the notice went to a prior address.)
In that sense, public record information on your credit reports can alert you to important issues that need to be addressed. If one of these records no longer meets the new data standards to be reported to the credit bureaus, it won’t show up on your report, but the judgment or lien could still cause you headaches.
If you have an outstanding judgment against you, for example, that judgment doesn’t disappear just because it isn’t on your credit reports. Judgments can be enforced for years, sometimes decades, depending on state law.
If you don’t pay a judgment, interest and other fees may continue to accumulate, and in some states judgment creditors can seize funds from your bank account or garnish your paycheck to collect. Similarly, if you owe a tax lien, the IRS or your state taxing authority may be able to intercept future tax refunds, take money from your bank accounts or go after other assets, depending on state and federal regulations.
In addition, a lender may ask about these items on a credit application and you’ll want to answer truthfully. And at least one agency, CBCInnovis, plans to sell this type of information to lenders.
More Changes Coming
In addition to the changes in public record information that is reported, fewer collection accounts may appear on credit reports in the near future. Specifically, collection agencies or credit reporting agencies will delete medical collections paid — or being paid — by an insurance company. In addition, medical collection accounts won’t appear on credit reports before a 180-day “waiting” period which will hopefully provide enough time for insurance to pay the bill, or for disputes with insurance companies to be resolved. (This change won’t go into effect until September 2017.)
This article was originally written on June 26, 2017 and updated on January 30, 2020.
Is this for real? How will we know if were on the list or our State will comply with this? Or do they have a choice?
Good questions, Judy!
The decision to remove the data from credit reports is being made by the major credit reporting agencies, so even if data is submitted by a state or local government (these are broadly known as “data furnishers”) it will not be listed on your credit report if it doesn’t meet the new data standards for personally identifiable information. As far as how you will know if a lien or judgment that previously appeared on your report has been deleted, the only way to find out is to check your credit report data with the major credit reporting agencies. While the new rules go into effect July 1, the bureaus have said that the files will be removed during the month of July. You can check your personal and business credit scores for free on Nav.com to monitor any changes to your scores.