Most people know they have a credit score and that lenders, including mortgage lenders, review it during a loan process. But it is less common to fully understand how a credit score is determined, what it predicts, and how this can affect your waterfront home buying process.
Credit scores are statistical formulations that predict a person's credit worthiness. Lenders all over the country use them to decide whether or not to extend credit, the amount of credit they will extend, and the terms of the loan. Consumers in Manasquan, NJ and all over the country who manage their finances responsibly and pay their bills on time enjoy high credit scores that are attractive to lenders. A high credit score can literally save them thousands of dollars over their lifetime in better interest rates.
Credit scoring model builders designed the credit scoring model to be highly predictive of whether or not a consumer will pay his or her bills on time. There are rarely changes in the way the basic scoring model works, especially on the items included in the credit report and figured into the score. However, on July 1 of 2017, there will be a shift in data collection that will affect a number of consumer's credit scores in a positive way.
All three credit bureaus, Experian, TransUnion, and Equifax, are implementing a new rule in regards to two types of financial information, tax liens and civil judgments. These pieces of information will need to undergo new identification data points in order to be included in a person's credit file. If they do not hit three of the four data points, the information will not be included in the consumer credit report.
For reference, let's briefly explain each of these debts.
Tax liens: A lien imposed upon a property by law to ensure the payment of taxes. This lien can be levied because of failure to pay property tax, gift tax, income tax, or other taxes.
Civil judgments: A ruling against a person in court concerning civil, not criminal, matters. These typically involve a monetary settlement. Examples of common civil judgments are child support cases, real estate disputes, contract disputes, and employment discrimination claims.
The identification factors being implemented are name, address, social security number, and date of birth. While it's commonly assumed that everything included in a credit report matches these factors, that has not been the case in the past. It's expected that at least half of current tax liens and the majority of civil judgments will be removed with this new rule. As of July 1, 2017, every tax lien and civil judgment that can not be matched up with at least three of these data points will be removed.
Goal of the Change
According to the Consumer Financial Protection Bureau, consumer complaints about inaccurate information on their credit reports are one of the most common issues reported. These problems are driving the change in whether or not tax liens and civil judgments will be included as part of the credit report information.
A recent statement by the Consumer Data Industry Association explains the concerns that have driven this change. Data accuracy and updated information are the goals, as many consumers deal with errors on their credit reports that hinder them from buying homes, cars, and being approved for other credit.
An initiative launched by the three bureaus called the National Consumer Assistance Plan is pushing for more "transparent, accurate, and understandable" consumer credit reports. Every year, millions of consumers must deal with erroneous, out-dated, and inaccurate reporting issues. The bureaus are looking to decrease that number.
Frequency Requirements for Re-verification
In addition to implementing the identification data points, the new standards will also require each debt to be re-verified with the courts every 90 days. If they are not, the information will be removed from the credit report. This is being implemented to limit the effects that old, outdated information has on a consumer credit report.
Effect on the Consumer Credit Report
Civil judgments and tax liens weigh heavily on a consumer's credit score, so this change will possibly increase millions of consumer credit scores. By removing these pieces of information, the credit score will be recalculated without the negative information. In many cases, it's predicted to be the difference in being approved and denied for a loan.
Recent predictions have been released as to how many consumers will benefit from this change, and by how much. VantageScore, one of the biggest credit scoring model builders, estimates that 1 in 12 people will see score increases because of the removal of this information from the credit report. The average credit score increase is expected to be around eleven points.
Concerns About the Change
While many home buyers and other consumers hoping for approved lines of credit will consider this change to be good news, there may be a down side for lenders that use credit scores as part of their loan decisions. Civil judgments and tax liens have previously been viewed as accurate predictors of a consumer's ability to pay, or not pay, his or her debts on time. With much of this data being removed in July, it's possible for lenders approve loaning money to consumers who are riskier than their credit report portrays them to be.
How will these new guidelines for reporting civil judgments and tax liens change the way consumers get approved or denied credit? Only time will tell once they are implemented. It's smart for consumers to not bank on this change as the "golden ticket" to get approved for a loan. Managing finances wisely, taking on debt sparsely, and paying bills on time is the best way to ensure a high credit score that brings many beneficial rewards.