Effective July 1, 2017, three of the major credit-reporting companies began following improved standards that will cause some credit scores to rise. As part of the National Consumer Assistance Plan (NCAP), TransUnion, Experian and Equifax are no longer including information about tax liens and civil judgments on a consumer’s record if the data doesn’t include the person’s name, address, Social Security number and date of birth. “These two factors are known to bring down credit scores, so removing them could affect about 11 percent of consumers,” says MidSouth Bank Chief Lending Officer Jeff Blum.
The change is an attempt to improve credit-reporting accuracy overall, Blum adds, and follows a 2016 settlement between the three companies and 31 state attorneys general. Tax lien and civil judgment information is often attached to the wrong consumer due to partial or redacted Social Security numbers. Although people who have had a lien on their taxes or a civil judgment against them are at a higher risk of defaulting on a new loan, consumer complaints about inaccurate personal information on credit reports are also high.
“We believe the enhanced standards for public records carefully balance the concerns of consumers and regulators about public record accuracy while at the same time ensuring that creditors can continue to rely on credit report data and credit scores derived from the data,” says Eric J. Ellman, interim president and CEO at the Consumer Data Industry Association.
Even so, banks may need to make some changes to the way they use credit scores and find new ways to get this information. Alternative credit scoring models that use trended data could be the answer and are part of VantageScore’s new credit score model in reaction to the settlement. Trended data is described as a monthly snapshot of certain pieces of information presented in a way that shows how a consumer’s behavior changes over time. Information could include spending patterns, past balances, credit utilization and payment history.
Analyses conducted by the credit reporting agencies and FICO and VantageScore show only modest credit scoring impacts as a result of the changes to public record standards.
FICO — which says its credit scores are used by 90 percent of U.S. lenders — predicts that roughly 0.35 percent of the total scorable population, or some 700,000 consumers, is projected to have a score increase of 40 or more points. That’s a small number in regard to the industry, and the company expects that consumers who have a tax lien or judgment on their file will have other red flag indicators such as collections or serious delinquencies as well.
Consumer credit scores can affect everything from approval for a loan to the amount of interest charged, according to MidSouth Bank’s Blum. “Even those consumers whose score may rise as a result of the new standards should be diligent about checking their score and keeping it at 720 or better,” he explains.
The NCAP notes that consumers are entitled to a free credit report from each credit-reporting agency once every 12 months, available by visiting www.annualcreditreport.com.
4 Ways to Improve Your Credit Score:
- Pay your bills on time.
- Make monthly payments in full.
- Check your credit report for accuracy.
- Keep credit card balances 50 percent below the limit.
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