Credit Scores May Improve as Much as 30 Points

Credit reporting and credit scores play a critical role in American consumers’ lives. These scores and reports will decide the interest rates you would need to pay for your credit cards, car loans and even mortgages. If your scores are really bad, it could mean that you don’t get a loan at all.

No More Tax Liens Affecting Credit Scores

Now, according to a recent report published by the Consumer Financial Protection Bureau (CFPB), multiple problems were identified in the three big consumer reporting agencies, Experian, Equifax and TransUnion. The Bureau also made recommendations on how these problems could be fixed so that consumers could improve the accuracy of their credit scores and reports. The CFPB stated that the biggest issue it found with the three agencies was the reporting of incorrect information. By removing incorrect negative information on credit reports, about 12 million consumers would see their credit scores improve by up to 30 points or even more.

Last year in July, the credit reporting agencies had all civil judgements data as well as half of the tax lien data from credit reports, which gave a boost to consumer credit scores. From April 16 this year, all the three agencies have stopped reporting tax lien data in credits reports. Tax liens are imposed against properties when owners of those properties have neglected to pay their taxes on said properties. Civil judgements are court ordered debts, usually monetary, that owed by the losing party in a legal dispute. Both these types of information have a negative impact on a person’s credit score and will remain on a person’s credit history for a long period of time. According to LexisNexis Risk Solutions, about 11% of the population had a tax lien or judgement removed from their credit reports. And based on their investigation, the research firm says that credit scores can go up by as much 30 points now.

No Real Impact

According to the senior vice president of the Consumer Data Industry Association, Eric Ellman, an analysis carried out by credit reporting agencies along with the credit score developers VantageScore and FICO showed that there was only a moderate impact on consumer credit scores. Additionally, the follow-up report by the CFPB  revealed that only a small number of people who had tax liens or civil judgements removed from their reports last year saw significantly improved credit scores that actually improved their credit profiles.

Actual Impact

According to a business development manager at LexisNexis, Nick Larson, if banks have less information about consumers’ borrowing behaviors, then their ability to differentiate between high-risk and non-risky borrowers is negatively impacted. This means that servicers and lenders would then need to protect themselves against that risk. Therefore, they would need to charge higher interest rates for everyone, rather than basing interest rates on a borrower’s credit scores. In fact, creditors feel that this move by the CFPB will actually create false positives that will make a person’s credit risk appear lower than it actually is.