Have a bad credit score that’s keeping you from buying a home? You’re in luck: In July, credit reports are undergoing a major cleanup that could help.
Your credit report and score, of course, are scrutinized by lenders since they reveal how well you’ve paid off past debts. The problem? A Federal Trade Commission study found that 1 in 4 people spots errors on the report. Two areas that are notorious for being inaccurate are tax liens and civil judgments.
Basically, a tax lien means you haven’t paid your taxes; a civil judgment means a court has determined that you owe someone money. Understandably, when these blemishes pop up on your report, they make lenders leery. However, according to Eric J. Ellman, senior vice president for public policy and legal affairs at the Consumer Data Industry Association, as much as half of tax lien data is inaccurate or incomplete, missing key info like your name, address, Social Security number, or date of birth. And experts say civil judgments aren’t much better. So you might be getting dinged for these, even if it’s a case of mistaken identity, or you paid them off long ago.
While consumers can purge credit report errors by disputing them, the three largest credit-reporting bureaus (Equifax, Experian, and TransUnion) have decided to pitch in to keep these errors from ever hitting your report in the first place.
Starting July 1, these three companies will start excluding tax lien and civil judgment records from credit reports if they’re lacking your name, address, Social Security number, or date of birth. Claims that have all this info will remain on credit reports; those that don’t, won’t.
The upshot? If you’re one of those unlucky people whose credit reports have been dogged by faulty tax liens or civil judgments, they could disappear—and your credit score might get a boost, no effort on your end required.
How much will credit scores rise?
Of the 200 million Americans with credit scores, about 12 million—or 6%—will see them rise in July once these incomplete tax liens and civil judgments are purged from their reports. But don’t get too excited; experts estimate that the effects on scores will be modest at best, with 11 million seeing an increase of 20 points or less.
Which begs the question: Will it be enough to make a difference?
That depends on what shape your credit’s in to begin with. Your credit score—which is calculated based on such factors as late or missing payments, amount of debt, and length of credit history—ranges from 300 to 850, and the higher the better. If you credit score is 760 or above, you’re in the best credit score range, which means you will have no problem qualifying for a loan, says Richard Redmond, mortgage broker at All California Mortgage in Larkspur and author of “Mortgages: The Insider’s Guide.” If, conversely, your credit score is 420, you’re considered a very high-risk applicant and probably won’t make the cut.
If you’re not sure what shape your credit is in, you’ll want to check your credit report. By law you’re entitled to a free copy of your report from each bureau once a year. You can request the reports through AnnualCreditReport.com. (Note: Your credit score is not included on your free reports, but you can order that for a small fee.)
How will this affect home buyers overall?
While 11 million consumers stand to receive a modest boost of up to 20 points to their credit score, the policy change might not be enough for allof them to qualify for a mortgage, says Keith Gumbinger, vice president at HSH.com, a mortgage information website.
“A lot of people who have liens or judgments against them already have crummy credit to begin with,” says Gumbinger. Thus, “a 10- or 20-point increase isn’t going to make a difference for a lot of borrowers.” Moreover, some tax liens and civil judgments already meet the new reporting requirements. If that applies to you, your credit report isn’t going to improve—or if it did and you really are responsible for those black marks, they could reappear later once your accusers get the extra info they need.
Those who stand to benefit the most from the policy change, says Gumbinger, are borrowers who are on the cusp of qualifying for a home loan. For example, if you have a 570 credit score and receive a 10-point boost because tax liens or civil judgments are removed from your credit report, you might be able to qualify for an FHA loan, which requires a minimum 580 credit score. But the bad news for these consumers is that reporting agencies can refile tax lien and civil judgments to meet the new standards. In other words, “people’s tax liens and civil judgments may disappear temporarily, but many of them are going to come back again,” says Gumbinger.
Bottom line: While these new reporting standards for tax liens and civil judgments might help a small group of home buyers obtain mortgages who wouldn’t qualify otherwise, don’t pin your hopes on this change too much. Instead, consider it a wake-up call to check your credit report for errors and other blemishes—then take steps to raise your credit score.