Tax lien and civil-judgment information may be missing from credit reports beginning July 1, 2017. The deletion comes on the heels of a deal that the three major credit-reporting agencies made with 31 state attorneys general in 2015. That means that some judgments and tax liens normally on credit reports may disappear and some FICO scores may increase as a result. But all judgments and tax liens may not disappear depending on specific conditions.
The question is, does it make any difference to businesses that check the credit of prospective employees and tenants? As we’ll see, possibly not, and even if it does make a difference, there are still ways to look for judgments and tax liens.
The new requirements say that any judgment appearing on a credit report must contain a minimum of a name, address, and Social Security number and/or date of birth. They also require that representatives of credit reporting agencies visit county courthouses at a minimum of every 90 days. The reason for the change is that some judgment reporting is simply inaccurate. LexisNexis estimates that 96 percent of information about tax liens and 50 percent about civil judgments can’t be verified, reports Penny Crossman in a March 30, 2017 article in American Banker. “Some observers note that tax lien and civil judgment information is sometimes attached to the wrong consumer’s file due to a lack of identity information,” continues Crossman. The key word here is “sometimes.” The advantage for employers and landlords is that all judgments and tax liens we see on a credit report after July 1 are those of the person whose credit report it is, so no more getting away with saying “that’s a mistake on my report.”
Civil judgment and tax lien reporting are an essential part of predicting credit risk, explains John Ulzheimer, credit reporting and credit scoring expert. He says this move “dilutes” the value of a credit report. Well, maybe.
By far the biggest beneficiaries of the change are those whose credit falls in the subprime category. The net effect, besides the deleted judgment and tax lien information, is a possible bump in FICO scores. Fair Isaac, the company that provides FICO scores, predicts that about 11 million consumers will see an increase of under than 20 points, with 0.35 percent seeing a bump of 40 points or more. But tax lien and judgments often correlate with other derogatory information such as collections and serious delinquencies because people with judgments and such usually have other credit issues, too, thus “diluting” the bump in FICO scores.
Do we even care about FICO scores when we look at a credit report? Probably not so much. That is only a secondary indicator. The result of removing much of the judgment and tax lien data from credit reports and the resulting increase in FICO scores is much like holding a match under a thermometer. The temperature reading goes up, but it’s still 45 degrees outside. The upshot will be that lenders will rely less and less on a FICO score and more and more on “alternative data” and “trended data.”
Alternative data is probably a better predictor of someone’s credit behavior than is a FICO score. Included in “alternative data” are
- public and institutional data such as educational history and professional licensing
- property asset and ownership data such as home ownership, deed and appraisal sourced residence valuation, and recreational licensing
- court sources of derogatory items such as foreclosures, evictions, and bankruptcies, and
- economic health such as address instability and cost of living economic trajectory [where their income is and has been headed] (Lexis Nexus)
Also included will be utility and phone bills, items that are not reported to credit agencies unless they are egregiously past due and/or turned over to collection.
“Most of these sources don’t report to the traditional credit bureaus and aren’t included in commercial credit bureau scores.” (Lexis Nexus, “Alternative Data and Fair Lending” Aug. 2013). That, of course, may change.
Then there is what is called “trended data.” It is a superior predictor of credit worthiness. “Trended, historical, longitudinal or time-series data is an invaluable tool for gaining practical perspective into consumer behavior,” says Equifax in a 2014 report on trended data. They advise “You can gain a deeper understanding of specific consumer behavior history, including:
- Spending patterns
- Credit utilization
- Past balances
- Payment history
As Equifax explains on its website, “two consumers can have the same credit score, but one consumer’s score could be moving up while another’s could be moving down. That give those who check credit the ability to use “trended data to assess a consumer’s credit behavior over time.”
Equifax goes on to say that a consumer’s past behavior can help predict future behavior. That means when we analyze a credit report, we don’t just look at how many past-due bills he or she has but also what that person’s current spending and paying habits are. It might take a while for a FICO score to catch up, but we can spot either danger or positive signals by looking at trended data.
Along comes Vantage Score. Vantage Score, explains the Vantage Score website, shunts aside the exclusion of many judgments and tax liens so that “predictive performance loss is minimal due to the fact that each scorecard within the algorithm incorporates a combination of derogatory behavioral attributes.” What that means in plain English is that they use trended data. In addition, explains credit.com, it “not only provides scores to general consumers but also helps 30 to 35 million adults who may not have a credit profile . . . whether because they’re new to the world of credit or don’t use credit frequently.” Vantage Score currently gets about 10 percent of the credit-scoring business.
FICO scores are simply the thermometer, not a real predictor of credit worthiness, any more than the thermometer is a guaranteed accurate reporter of temperature since it can be affected by so many variables that can change its reading independent of the actual temperature. And that thermometer analogy will become more appropriate as judgments and tax liens vanish from credit reports. We want to know if there is a danger of bad debts lurking ready to bite someone who wants to rent from us or work for us and if our applicant pays bills at least close to on time. Looking at past due balances, payment history, and imminent repossessions is far more telling than an artificially created number. If necessary or desirable, judgment and tax lien information is still available from county courthouses, but by using other data reporting information, that may be unnecessary. Judgment and tax lien information is not required to judge credit worthiness since we have other information that we can be assured is accurate.
By Robert L. Cain
