With 1 July, the way credit scores will change

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Many people with tax liens, civil suits and medical debts may soon see an increase in their credit rating.

From July 1, about half of the tax liens and almost all civil claims pending (as big negatives) will be removed from consumer credit files thanks to an agreement reached by three major credit bureaus: Experian, Equifax and TransUnion, writes SF Chronicle.

In September 2017, consumer-friendly changes regarding medical debts will also take effect.

Companies involved in the calculation of credit scores, enter information from the consumer’s credit report into a special formula and get an estimate of the likelihood that a person will not pay the debt. From this indicator depends on the ability of a person to get a loan and the conditions offered by the bank. Some insurance companies also consider the credit rating as one of the additional factors when applying for insurance.

Studies show that the credit rating of people with tax liens and lawsuits usually grows after these criteria are removed from the ranking formula. As a rule, growth is about 20 points, in some cases it comes to 40 points.

Lenders who want to get the data taken out of the rating formula may simply ask borrowers in the loan application to indicate if they have collateral, civil claims or decisions on them. Or they may receive information from a special registry to which creditors have access.

Company LexisNexis Risk Solutionswhich sells public records to credit bureaus and other financial institutions, offers a new product called RiskView Liens & Judges Reportwhich, according to company representatives, “fills in the gaps” made by the changes that come into effect on July 1.

Starting from this date, the credit bureaus will no longer display tax liens and civil claims and decisions in the credit report if they do not indicate the social insurance number or the date of birth of the person. About half of the tax liens and almost all civil claims and decisions do not contain information about the social security number or date of birth, which excludes them from credit reports when forming the rating.

According to statistics, people with tax liens or lawsuits about 2 times more often do not pay loans than people without them. But the experts came to the conclusion that, in most cases, consumers with mortgages and lawsuits have other derogatory marks in the credit file that significantly lower their rating.

Experts at FICO have calculated that approximately 200 million of 12 millions of consumers with a security deposit or a claim will be deleted from the formula for calculating the rating. As a result, about 11 million will see an increase in credit rating from 1 to 19 points, another 1 million will face a more serious increase in rating.

About 700 thousands of people will see a jump of 40 or more points. These are people who have no other negative credit information in their case, other than collateral or a financial civil action.

At the same time, about 700 thousand people may notice a decrease in the rating, since the exclusion of these criteria will lead to the fact that they will be moved to another category to calculate their credit rating, where the key factor will be an indicator that was previously taken into account only indirectly in their history.

In September, the display rules in the credit history of medical debts will be changed. According to the new rules, the bureau will not display the medical debts declared by the clinics until at least 6 months from the moment the debt is recognized as an offense (this happens when the clinic submits its withdrawal to a collection company). Also, any existing medical debts that insurance companies have paid or are in the process of paying will be removed from credit reports.

Experts say that this change will have almost no impact on the credit rating, since debts in less than 6 months and now are practically not taken into account in credit files.

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