Recent changes to credit reporting have been announced and they will start taking place this July.
The Change- TransUnion, Experian and Equifax will no longer include information about tax liens and civil judgments on a consumer’s credit report if the data doesn’t include the person’s name, address, Social Security number and date of birth. The first logical question is why would this information ever be reported in the first place if the personal information listed above wasn’t available?
Many liens and most judgments don’t include all that data, mainly because Social Security numbers are often redacted for security reasons. Some consumers see their credit scores improve with the removal of these types of debts.
Reason for the change– The change is the result of a settlement the three major credit bureaus made in 2016 with 31 state attorney generals over alleged problems with credit reporting accuracy. LexisNexis Risk Solutions has estimated that 50% of public records information about tax liens and 96% of information about civil judgments do NOT currently include a full or redacted Social Security number and therefore will not meet the new standards. LexisNexis Risk Solutions is the company that provides this information to the credit bureaus which is how this type of information gets on a credit report in the first place.
Is this change good or bad?- This really depends on who you ask. Some say that tax liens and civil judgment information is sometimes attached to the wrong consumer’s file due to a lack of identity information. In this case, the change is great and should help to alleviate that problem.
Others argue it’s important for lenders to know if consumers have had a lien on their taxes or a civil judgment against them, because their risk of defaulting on a new loan is much higher.
Regardless of how lenders feel about the change, banks will have to do some rethinking of the credit scores they use in their underwriting models starting in July, simply because some information they used to rely on will no longer be included.
How credit scores will change-FICO, which is the current preferred score used by lenders says it doesn’t see the need to change its credit model to accommodate the loss of public records. The company projects that just less than 11 million consumers will see a score increase of less than 20 points with this change. They believe the numbers are small because most consumers that have a tax lien or a civil judgment on their file have other derogatory marks that will remain after the public record information is removed.
VantageScore, the joint venture that is owned by the three credit bureaus provides credit score data to 2,400 banks and other companies, has announced an update to their scores. Their new scoring model is called 4.0. This update is a reaction to the absence of tax liens and civil judgments. The main change is adding “trended data” to the score. Trended data is a monthly snapshot of certain pieces of information presented in a way that shows how consumer’s behavior changes over time-in increased or decreased credit card use, for instance. An increase in use is interpreted as higher risk and will drive the score down.
Bottom line- any change that adds accuracy to a credit report is good! However, I do not believe that will be the end of the conversation. Lenders are always looking for ways to better predict the risk associated with each consumer, removing these public records will change their ability to do that even if it’s only a slight change. Since they cannot create new accounts on a credit report, I believe they will further scrutinize how a consumer handles their credit card accounts. Balance to limit ratios have always been a huge part of the score, but I believe that will only become more important in the future. If you need help understanding what is important in this category you can watch this short video.