“The Only Thing That Is Constant Is Change” – Heraclitus of Ephesus c.535 – c.475 BC
This bit of ancient philosophical wisdom applies to life in general as well as credit reports and the scores that are derived from what appears on them. And changes are indeed on the horizon. Here’s what’s about to go down, and why it could be cause for celebration for millions of Americans.
First know that what you do with money and debt often winds up on a consumer credit report. TransUnion, Equifax, and Experian are the three major credit reporting agencies. Everything (except your personal identification) that is listed on them is inputted into mathematical models designed to predict lending risk. These are credit scores, with the most common being FICO and VantageScore.
Because the information on your reports varies with activity, your credit scores regularly fluctuate. Bills like utilities, internet service, and gym memberships are absent from credit reports unless you’re seriously delinquent. In that case the business will usually sue you for what you owe or sell the balance to a third-party collection agency, which also may take legal action you if you don’t satisfy the balance. If you lose the case, a civil judgment will be placed on your credit reports in the public records section. At that stage your credit scores will plummet.
What else can be in the public records section? Delinquent taxes, which will show up as a lien.
On the other hand, loans and credit cards appear on your credit reports beginning when you applied and opened them, then every month after that. Keep the accounts in positive standing by sending your payments on time (the most important scoring factor) and your revolving balances low or at zero, and your credit scores will be high. However, the more debt you have the worse your credit utilization ratio will be. This ratio is amount of debt on a single account as well as on all others, relative to the amount you can contractually borrow.
Now for what will be different, as of July 2017.
If you owe money for taxes which resulted in a lien on your credit report, prepare to breathe a sigh of relief, as it may no longer be reported. Tax bills can be extremely high, so when their gone, your credit utilization ratio will automatically adjust. Imagine that you owe $20,000 dollars to the government and it’s listed as a matter of public record. If the total of your credit card lines is also $20,000, your ratio is at 100 percent. Ouch! Remove that tax debt from the equation, however, and your utilization ratio broadens dramatically and your scores will soar.
Now consider what could happen if you had been sued for a debt and lost the case. That situation would result in a civil judgment listed on your credit report, again in the public record section. If the judgment is recent and the debt is large, your scores would be in serious trouble. So more great news: after July 1, the judgment will likely be purged and its sudden absence will result in a credit scoring spike.
Mind, though, that there are exceptions. You may not benefit from the regulatory changes if the information that’s in the public records section is absolutely thorough. The tax lien or civil judgment would need to specify your complete name, mailing address, Social Security Number, and date of birth. If it does, the dings may stay put. That’s uncommon, though, as such data is most often truncated.
To be sure, take a look at your credit reports by pulling them from annualcreditreport.com. It’s free once a year, and you will get a merged file by request all three of once.
Focus your attention on the public records section of the reports. If you see a tax lien or a civil judgment that doesn’t contain all of the data points I mentioned, information deletion is headed your way.
If you’re wondering why this is all happening, that’s understandable. It does seem a little odd. Yet there is a valid reason and it has to do with a poor history of public record keeping. In short, if they can’t prove the lien or judgment is really yours, you should not be penalized if it could be wrong. According to the Consumer Financial Protection Bureau, the credit reporting agencies have been listing inaccurate information regarding public records on peoples’ credit reports for too long. By law, that is not acceptable. The Fair Credit Reporting Act clearly states that only correct and timely information may appear on a consumer credit report. The abundance of mistakes over many years prompted the upcoming action.
If you will experience the expungement, you easily could see a credit scoring escalation overnight. People with poor or mediocre ratings now may wind up in the good to excellent range by summer, without having to do anything.
After that it will be up to you to keep your scores high. You can do that by paying tax obligations when you should so a lien (with complete identification) is not ever placed.
For all financial obligations, whether they live outside the credit reporting process unless they’ve gone bad or are always on your file, the best thing you can do is pay bills on time. That action indicates responsibility, something all lenders and businesses value. Do not rely on credit cards or loans to suffice for a lack of income, overspending, or to cover the cost of emergencies. If you do, it can result in consumer debt that sticks to your credit reports like crazy glue until you get it under control.
Odds are you won’t get a reprieve exactly like the one that will soon occur again, so make the most of this anomaly. Cheer the adjustment if it benefits you, but adhere to perennially sound borrowing and credit report rules, since they will be with all of us for the foreseeable future.