Credit Scores Will Improve As Credit Reports Exclude Negative Information

By Nick Clements

As of July 1, the nation's three credit reporting agencies will remove and exclude certain negative information from credit reports. Tax liens and civil debts will no longer be reported on credit reports if the negative information does not include a customer's name, address and Social Security Number or date of birth.

What Does This Mean For Me? 

Tax liens and civil debts can have a meaningful and negative impact on your credit score. According to FICO, although the impact of a tax lien diminishes over time, its presence on a credit report is "quite serious." Various credit score simulators demonstrate that a tax lien could take as many as 100 points off your score, making it difficult to obtain credit or expensive if you do.

If you have incomplete tax lien or civil debt records on your credit report, the removal should have a meaningful positive impact on your score. The change is supposed to happen on July 1, and you should see an immediate boost. There are also a number of places where you can find your free FICO score, including from many credit card companies that offer the service to everyone (not just their customers).

Why Is This Happening? 

One of the biggest complaint categories to the CFPB remains inaccurate information on credit reports. Under significant pressure, the credit reporting agencies are putting the burden of proof on the people and companies submitting negative information. These changes are not meant to reduce the negative impact of failing to make tax payments. Instead, the changes are meant to ensure that only accurate negative information is reported to the bureaus.

Are There Any Downsides? 

For consumers in the short term, this will either be beneficial (to those people who have negative information removed) or neutral. However, there are some risks longer term. Having a tax lien on a credit report is highly predictive, and is a helpful indicator of credit risk. The reason people lose so many points from a tax lien is that the data shows how risky that behavior is.

The downside is for lenders: now some risky people, with legitimate tax issues, will look less risky on credit reports. Over time, that could increase the default levels of better quality credit scores - driving up the cost of credit to everyone else in those better FICO buckets. Credit reports exist to ensure that the lowest risk people get the best terms and conditions. If higher risk people end up with lower risk scores, credit can become more expensive for everyone over time.

Bottom Line

There is a reason people complain about credit reporting agencies: there is too much sloppiness (at best) and fraud (at worst) in credit files. This recent move puts the burden of proof on people or entities filing negative information on credit reports. That is good news for consumers, and that is a good move long term.

There is a short-term risk: people who legitimately avoided paying taxes benefit from the removal of negative information due to clerical errors. But that is still the right decision. If you cannot keep track of who owes you money, you shouldn't be able to file negative information on a credit report.