Starting this week, some consumers may have a higher credit score.
Because of improved standards for utilizing new and existing public records, the three major credit reporting companies are now excluding all tax liens from credit reports. That means some scores will head higher, for some by as much as 30 points.
Credit scores, notably those from FICO, one of the largest credit scoring companies, generally range from 300 to 850. A good score generally is above 700, and those over 760 are considered excellent.
Credit reporting and scores play a key role in most Americans' daily life. The process can determine the interest rate a consumer is going to pay for credit cards, car loans and mortgages — or whether they will get a loan at all.
The actions come following a study by the Consumer Financial Protection Bureau that found problems with credit reporting and recommended changes to help consumers. (Incorrect information on a credit report is the top issue reported by consumers, according to the bureau.)
Last July, credit reporting companies removed nearly 100 percent of civil judgment data and about 50 percent of tax lien data from credit reports. Now they have removed the rest. The latest change took effect Monday.
As a result, LexisNexis Risk Solutions predicts that about 11 percent of the population had a judgment or lien removed from their credit file, according to the company's own estimate.
Once that information is stripped out, credit scores may go up by as much as 30 points overall, LexisNexis found. LexisNexis also provides lenders with data to make decisions on consumer loans.
Other industry groups have said these changes will have less of an impact.
"Analyses conducted by the credit reporting agencies and credit score developers FICO and VantageScore show only modest credit scoring impacts," Eric Ellman, a senior vice president of the Consumer Data Industry Association, said in a statement when the changes were first announced. The association represents Equifax, Experian and TransUnion, the three largest credit reporting companies.
A follow-up report by the CFPB found that only a small number of consumers who had civil judgments or tax liens removed from their reports in July experienced a jump significant enough to improve their credit profile.
For consumers who are not directly affected by the change, there could be consequences as well.
If banks are less able to differentiate a risky borrower from a nonrisky borrower, "lenders and servicers have to hedge for that risk," said Nick Larson, a business development manager for the financial services unit of LexisNexis Risk Solutions.
As a result, lenders will have to charge higher interest rates across the board, he said. "Overall, consumers actually get hurt."
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