Up to 7% of people with credit scores could see them rise beginning July 1 when credit reporting agencies will start excluding most civil judgments and about half of all tax lien data from credit reports.
As announced in March, the three major credit reporting agencies, Equifax, Experian and TransUnion, will start holding public data to new standards. After July 1, any public record data must include a consumer’s name and address, as well as their Social Security number or date of birth, to appear on their credit file, according to the Consumer Data Industry Association.
Who Is Affected?
Most people should see little impact on their credit scores, according to an analysis conducted in March by FICO, the most common provider of credit scores. About 7% of people with FICO scores, or about 15 million of the 220 million Americans with scores, will see a judgment or tax lien removed from their credit files, the analysis said.
Public records like bankruptcies, tax liens and civil judgments typically stay on credit reports for seven years, so those who see these items removed get a long-lasting weight removed from their credit scores.
However, most of the people who have items removed will experience score increases of less than 20 points, FICO said. The reason the increase isn’t greater is because 92% of people who will have tax liens or judgments removed have other negative information on their credit files. To see if the change affects you, you can check two of your credit scores free on Credit.com.
In addition to culling the public record data, the agencies also plan to update their public record information at least every 90 days.
While the credit score increase is relatively modest, it may still be enough to allow people to qualify for loans or credit reports that may have been out of reach before. Most of the people impacted had a median credit score of 565 before the change.
Twenty points above that median puts people in range of a Federal Housing Administration loan with only a 3.5% down payment. The minimum FICO score required for such a loan is 580.
The National Consumer Action Plan
Equifax, Experian and TransUnion are making the changes as part of a 2015 settlement with 31 state attorneys general who were investigating the agencies over the accuracy of credit reports. In response, the agencies launched the National Consumer Action Plan, which aims to make credit information more transparent for consumers.
In addition to the public record data, the plan also prohibits the agencies from including medical debts on credit reports until after 180 days to allow insurance payments to go through. The plan also calls for the bureaus to hire specially trained employees to deal with credit disputes and allow consumers to obtain an additional free credit report if they find an error on their free annual credit report.
Bankruptcy. Foreclosure. Short sale. These are the items that probably jump to mind when you hear the words “credit score killers,” but there are plenty of other line items that can really tank your credit — particularly if your score was stellar at the time they hit your credit report. But knowledge is power — and many credit score crushers can be easily circumvented or ultimately addressed. (You can see where your credit currently stands by viewing two of your free credit scores, updated every 14 days, on Credit.com.)
Here are five big credit score killers — and how to avoid them.
1. A First Missed Payment
Blame it on the fact that payment history is the most important factor of credit scores, but, yeah, the first time you go past due, expect your numbers to take a dive. Per a FICO study, a single 30-day late payment can cause a good credit score of 780 to fall 90 to 110 points. An average score of 680, meanwhile, can fall by 60 to 80 points. And that blemish will stay with you for awhile —seven years from when the delinquency occurred, in fact. (Here’s the full list of how long stuff stays on your credit report.)
The good news? If you course-correct, your score should steadily rebound the further you get away from that date. Plus, no guarantees, but there are things you can do to avoid winding up with a missed payment on your credit file in the first place.
How to Avoid a Missed Payment: Set up auto-pay from a linked checking account each month. If that move makes you wary, sign up for alerts that’ll let you know when your bill is about to come due — or whether you’ve just missed one. And, if you do mistakenly skip a due date, call your issuer to make it right. They may be willing to waive the late fee and not report the missed payment to the credit bureaus “just this one time,” especially if you’ve never missed one before.
2. An Error
Because they happen. And more often than you think. Per a 2012 report from the Federal Trade Commission, one in five Americans had an error on their credit reports. Some of these mistakes are innocuous enough — a misspelled name, for instance, won’t drop your score. But a bunch of missed payments that don’t belong to you certainly will, as would new credit accounts used (and abused) by an identity thief.
It seems like such a small thing — a $132 utility bill forgotten just after you graduated college. Or a $200 medical bill you thought your insurance had paid. Unfortunately, when it comes to credit scores, a single collection account can be no joke. You could see your score drop 50 to 100 points once one winds up on your credit report — and that account can legally stay there for seven years, plus 180 days from the date of your first missed bill, whether you go on to pay the collector or not. (We say legally because some collections agencies have recently announced changes that could help you get collection accounts off of your credit reports sooner than you think.)
How to Avoid a Collection Account: This can be a bit tricky, we admit (medical bills, in particular), but you’ll want to keep an eye on your mail and resist the urge to ignore any calls from a debt collector. While there are plenty of scammers out there and mix-ups do occur, the debt could prove to be legit. Quick tip: Request written verification to confirm before agreeing or handing out any payments.
Beyond that, keep an eye on your credit reports so you can readily catch any collection accounts that may pop up. And, if you do owe the debt, consider squaring it away. Yes, they can both hang around your credit reports, but scoring models generally weigh paid collections as less than unpaid ones — and some newer models even ignore paid collections entirely.
4. A Maxed-Out Credit Card
Credit utilization is the second most important factor of credit scores, so bumping right up against your credit card’s limit can be problematic, particularly if that’s the only card you’ve got or, worse, you’re maxing out multiple credit cards. Remember, for best credit scoring results, it’s recommended you keep the amount of debt you owe collectively and on individual cards below at least 30% and ideally 10% of your credit limit(s).
How to Avoid a Maxed Out Credit Card: Monitor your credit card statements regularly, so you know exactly how much you’re charging. Consider paying your credit card bill more than once a month in an effort to preclude a big balance winding up on your credit report. Or aim to pay as much off as you can by your statement billing date, not due date, since that’s generally the balance issuers report to the credit bureaus each month.
And, depending on your situation, you could also consider asking for a higher credit limit (say you’re paying off all your bills in full and on time on a starter or secured credit card with a seriously low credit limit). Just note: The request could result in a credit pull, which could lead to a hard inquiry on your credit report, which could ding your credit score. But that small dip could ultimately be offset by the increased credit limit — so long as you don’t use it, of course.
5. A Tax Lien
No, Uncle Sam isn’t in the habit of reporting your full payment history to the credit bureaus. But leave that government debt unpaid long enough and you could wind up with a tax lien on your credit report, which will do big damage to your credit score. Generally, the Internal Revenue Service will file a tax lien automatically if you owe them $10,000 or more.
How to Avoid a Tax Lien: Be sure to pay Uncle Sam. But, more pointedly, if you’re saddled with a tax bill you can’t afford, contact the IRS to see if you can work out a payment plan. If a tax lien is filed against you and you later pay the balance due, take steps to have the lien withdrawn from your credit reports. You can do this by filing IRS Form 12277.