Get Ready for a Credit Score Boost as Tax Liens Fall off Reports

Good news — you may see a bump in your credit score soon.

As of April 16, the three major credit bureaus officially removed all outstanding tax liens from consumer credit reports. The change was the result of long-anticipated requirements implemented by the Consumer Financial Protections Bureau (CFPB) after a review of credit reporting standards last year. In the review, the watchdog agency found credit reporting agencies often report erroneous information on consumer credit reports that they obtained from public records databases.

How much of a credit boost can you expect? If you had prior tax liens on your credit reports that will now fall off, don’t get too excited. Your score actually may not change much. VantageScore and FICO have each done studies about the potential impact the removal of civil judgements and tax liens will have on consumer credit scores, and the results were fairly modest. VantageScore found consumers would see only a 10-point increase and FICO estimated an increase of less than 20 points. The reason for such a meager credit score improvement could be because “most people who have judgments and liens have other unrelated derogatory entries, which is why the score changes aren’t terribly significant,” credit expert John Ulzheimer told MagnifyMoney.

Will this stop lenders from finding past liens on your record? In short, no, it won’t.

Liens are public record, and lenders looking to evaluate your credit can obtain records of any liens from other sources, such as LexisNexis, Ulzheimer says. For example, mortgage lenders will hire a title search company to search for outstanding liens against both borrower and seller in a real estate transaction, which goes above and beyond what will show up on a typical credit report.

Why the change is happening now: The decision to eliminate all tax liens follows a lawsuit last year that was settled with TransUnion to improve the accuracy of credit reports, further expanding the requirements the CFPB imposed last year. The lawsuit found there was “systemic inaccuracy of their judgment and lien records for many years,” said Leonard Bennett, founding partner of Consumer Litigation Associates and lead counsel in the lawsuit against TransUnion.

Bennett went on to say that one of the major problems with the reporting of liens and judgments on credit reports was the inconsistent sourcing of data. People with similar names were matched incorrectly, and this led to errors on credit reports. This can be further evidenced by a study the Federal Trade Commission did in 2013 that revealed that an alarming one in five consumers reported mistakes on their credit report, possibly as a result of false liens.

Currently only TransUnion is legally obligated to remove liens and judgments from credit reports, but Experian and Equifax are following suit to potentially preempt any lawsuits against them.

Are tax liens going to be taken off credit reports forever? Take note that the current removal of liens and judgments from credit reports is unlikely to be permanent. Bennett says if TransUnion can accurately prove it’s reporting liens to the correct customers, then they may be shown on credit reports again, but not for at least a year and a half.

Other changes: There were requirements imposed on all three bureaus in July 2017, per the National Consumer Assistance plan. This plan required civil judgment data to have a consumer’s name, address, Social Security number or date of birth before being added to a consumer’s credit report — creating more accurate reports.

Learn more: How to dispute credit report errors on your own

Check you credit report regularly. The best way to get ahead of false reports or fraud is to monitor your credit report using a free tool like My LendingTree (note: LendingTree is the parent company of MagnifyMoney) and request a free copy of your credit report. If you notice anything odd on your credit report, dispute it with the credit bureaus.

If you notice errors on your credit report, you will need to dispute them with both the credit reporting company — Equifax, Experian, TransUnion — and the company that provided the information (aka the information provider or furnisher; such as a bank, credit card company or landlord).

Step 1: Dispute errors with the credit reporting company. See below for several options:

Step 2: Dispute the error with the company that provided the information. We recommend following the CFPB’s instructions and template for disputing the error.

The dispute process typically takes 30 days, and no longer than 45 days.

The 5 factors that make up your credit score

Your credit score is made up of five key factors that allow lenders to accurately assess your ability to manage credit:

1. Payment history — 35% of your score. This is the largest component of your credit score and is a record of your on-time or missed payments.
2. Amounts owed — 30% of your score: Utilization is the amount of your total credit limit you use versus how much credit you have access to. This is an important factor because it’s how lenders judge whether or not you can resist the temptation to use all your credit. If you tend to max out your credit line, you pose a greater risk than someone who uses a small amount of their credit. Try to keep this ratio under 30% as a rule of thumb.
3. Length of credit history — 15% of your score: The average length of your credit history across all credit products. This will fluctuate if you open a new credit card or take out a loan since your length of credit history will decrease — though it’ll bounce back in time. This is one reason it’s wise to keep old credit cards open, even if you don’t use them regularly.
4. New credit — 10% of your score: This is the frequency of credit inquiries and new accounts openings. Your score can take a slight dip from these actions, especially if they’re within a small time period.
5. Credit mix — 10% of your score: This is the different types of credit you have, including loans, mortgages and credit cards.