Personal Finance

Your credit score may soon look better

Stacy Cowley
Brenda Walker in downtown Richmond, Va., June 12, 2017.
Andrew Mangum | The New York Times

About 12 million people will get a lift in their credit scores next month as the national credit reporting agencies wipe from their records two major sources of negative information about borrowers: tax liens and civil judgments.

The change stems from a lengthy crusade by consumer advocates and government officials to force the credit bureaus to improve the accuracy of their reports, which are often speckled with errors and outdated information. Those mistakes can limit borrowers' access to credit cards, auto loans and mortgages, or saddle them with higher borrowing costs.

Starting July 1, the three major credit reporting companies — Equifax, Experian and TransUnion — will enforce stricter rules on the public records they collect, requiring each citation to include the subject's name, address and either their Social Security number or date of birth. Nearly all civil judgments and at least half of the nation's tax lien records do not meet the new standards, and will be eliminated from consumer credit reports.

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The change will benefit borrowers with negative public records, but it will also help thousands of people who have battled, often in vain, to have incorrect information removed from their files.

"We've filed hundreds of lawsuits over this," said Leonard Bennett, a consumer lawyer in Alexandria, Va. "Comprehensively fixing it hasn't been something the industry has prioritized."

That began to change two years ago, when a coalition of 31 state attorneys general cracked down on the credit bureaus and negotiated a deal that required sweeping changes to their practices. (New York's attorney general had previously reached a separate settlement with similar terms.) The credit bureaus have already made some adjustments, like removing traffic tickets and court fines from their files, but next month's changes will have the broadest effects yet.

Around 7 percent of the 220 million people in the United States with credit reports will have a judgment or lien stripped from their file, according to an analysis by Fair Isaac, the company that supplies the formula that generates the credit scores known as FICO.

Those people will see their scores rise, modestly. The typical increase will be 20 points or less, according to Fair Isaac's analysis. (FICO scores range from 300 to 850. Higher is better; lenders generally prefer people with scores of 640 and above.)

The biggest beneficiaries, consumer advocates say, will be those who are spared the frustration of trying to fix errors. False matches have been a common problem. Without the kind of additional identifying information that will now be required, a court record showing a judgment against Joe Smith can easily wind up on the wrong Joe Smith's credit report. (Last week, a California jury awarded $60 million to a group of consumers who said TransUnion falsely flagged some of them as terrorists and drug traffickers because it had mistaken them for others with similar names.)

Starting next month, the credit bureaus will also be required to update their public records information at least once every 90 days.

That change pleases Brenda Walker, a Virginia resident with a pending lawsuit against TransUnion over the company's monthslong delay in amending her report to show that a tax lien had been satisfied.

Ms. Walker said she had been turned down for credit cards, a car loan and a student loan she tried to take out for her daughter's education. "It wreaked havoc," she said. "My credit score was so damaged from something that had already been paid and released."

The flip side of the change, lenders warn, is that some borrowers may now appear more creditworthy than they actually are.

"This removes information from the picture that our customers get about what a borrower has done in the past," said Francis Creighton, the chief executive of the Consumer Data Industry Association, which represents credit reporting companies. "If someone has a big bill that they owe, that's something that should be part of the conversation."

But when the two largest credit scoring companies, Fair Isaac and VantageScore, tested what happens when tax liens and civil judgments are removed, both found that it did not meaningfully change the snapshot provided to lenders on most borrowers.

More than 90 percent of people with a negative public record have other negative information on their credit file, like late payments, according to FICO's analysis. VantageScore experimentally tweaked its model to focus on other data points, like the number of credit cards a borrower has with high balances, and found that the predictive value was almost identical.

"Not surprisingly, those with civil judgments and tax liens are likely to have lots of other credit blemishes," said Ethan Dornhelm, Fair Isaac's principal scientist. "These changes aren't going to bring those people into the tiers where they're going to qualify for prime credit."

As public records disappear from the big bureaus' reports, other data providers are eager to step in and fill the gap. LexisNexis Risk Solutions has for years gathered public records information from about 3,000 jurisdictions around the country and sold it to the credit bureaus. Now, with that business drying up, the company is marketing its own Liens and Judgments Report to lenders.

Because LexisNexis is not a party to the credit bureaus' settlement, it is still free to sell that information, said Ankush Tewari, a senior director with LexisNexis Risk Solutions. The company can accurately link people to their public records, even without identifying information like a Social Security number, with an error rate of around 1 percent, he said.

As the credit bureaus continue to work through the settlement terms, further changes are coming. Starting in September, their reports will eliminate medical debt collection accounts that are less than six months old, a change intended to reflect the sometimes-lengthy process of sorting out health insurance reimbursements.

Also that month, all data furnishers — the companies that provide information about consumers to the credit bureaus — will be required to include each individual's full name, address, birth date and Social Security number in their reports.