In a dramatic shift away from traditional monetary practices, FICO and the top credit rating agencies – Experian, Equifax, and TransUnion – have moved to drop tax liens and civil judgments from some credit reports. This follows the adoption of new “minimum” standards for what factors into your credit score. The major credit rating agencies will now require all documents related to your credit history to include your full name, street address, and either date of birth or social security number. This requirement will filter out any inaccurate information from your credit report.
So, how does this help you? The excitement surrounding this change focuses on two terms: tax liens and civil judgments. Let’s unpack these two terms:
- A tax lien is a federal legal claim filed against you (typically by the IRS) in response to a failure, on your part, to make tax payments. As public records, tax liens can have a very negative impact on your credit score. The best way to remove them is to pay off your tax debt and alert your credit bureau to take it off your report once paid off. Many customers suffer from inaccurate or outdated tax liens on their reports, so it’s important to maintain a clear record of your payment history in order to address any discrepancies.
- Although your possible criminal record is not taken into account when calculating your credit score, certain legal disputes are factored in. A civil judgment refers to legal cases and charges brought against you in a civil court. This can include child support cases, failing to respond to a lawsuit, and other non-criminal offenses that require you to pay damages. These damages are reported as debt, and as such can hit your credit score pretty hard. Unfortunately, civil judgments are very difficult to have removed from your credit report, and will remain on the report even after you’ve paid off the damages you incurred.
The effects of this change in requirements are far-reaching. By only accepting documents with your name, address, and either date of birth or social security number, credit rating agencies will necessarily exclude the majority of tax liens and civil judgments from customers’ credit reports. Many of these documents and claims are missing this new information, and so they will either be removed from your credit report or not be included in the first place. This is huge for many customers, and may be so for you too. The removal of tax liens and civil judgments, or both, from your credit report could increase your credit score by as much as 40 points. Additionally, disqualifying these documents will address any mistakes on your credit reports, mistakes notoriously difficult and frustrating to fix.
Although this change in credit score calculation won’t remove all tax liens and civil judgments, it is a move in the right direction. Now customers, you included, will be more distanced from their often complicated and highly context-dependent financial past and more empowered to make the financial decisions that are best for them in the future.