In 2018 tax liens were removed from consumer credit reports in part as result of a Consumer Financial Protection Bureau study that found issues with reporting public records information correctly.
Civil judgments were also included as information that is no longer reported by the major credit bureaus.
Bankruptcies are the only type of public record on credit reports.
Why tax liens were removed from credit reports?
The move to no longer count tax liens and civil judgments in credit reports and scores began in 2017 as part of the National Consumer Assistance Plan (NCAP) by the three major credit bureaus: Equifax, Experian, and TransUnion.
The NCAP was created to make it easier for consumers to correct credit report errors. The initiatives aim to improve the accuracy of credit reports and increase transparency for consumers.
Some specific reasons why tax liens were removed include:
- Tax liens are not a good indicator of a person’s creditworthiness. There are many reasons why someone might have a tax lien, such as job loss, medical expenses, or financial hardship. These reasons don’t necessarily mean that the person is a risky borrower.
- The five major components of credit scores don’t include a tax lien category. Your credit score is based on a variety of factors, including your payment history, credit amounts owed, length of credit history, types of credit and new credit applications.
- The accuracy of tax lien data was poor. The Consumer Financial Protection Bureau (CFPB) found that there were many errors in the way that tax liens were reported to credit bureaus. This made it difficult for consumers to dispute inaccurate information.
Can tax liens hurt your credit?
Tax liens can appear in public records, which can hurt your credit indirectly in a few ways:
- A tax lien can impact your debt-to-income ratio. Lenders can review public records as part of the decision making process. A tax lien increases your debt-to-income ratio, making it appear that you are a riskier borrower. Lenders may view a tax lien as a sign of financial instability and be less likely to lend you money.
- A tax lien can damage your reputation. A tax lien is a public record, which means that anyone can see it. This can damage your reputation and make it difficult to get a job, rent an apartment, or get approved for a loan.
If you have a tax lien, there are a few things you can do to minimize the damage to your credit history:
- Pay off the tax lien as soon as possible. This will remove the lien from public record and improve your credit score.
- Get a Fresh Start. If you owe $50,000 or less in back taxes, you can avoid a tax lien through the IRS Fresh Start Program.
- Get a letter of satisfaction. Once the lien is paid, a letter of satisfaction from the IRS or state taxing authority will show that the lien has been discharged and can help to improve your credit score.
- Dispute any errors in your credit report. If there are any errors in your credit report that are related to the tax lien, dispute them with the credit bureaus.
How do lenders know you owe taxes
Consumer reporting agencies like SageStream collects consumer public information from real estate transaction and ownership data, tax lien, judgment, and bankruptcy records, professional license information, and historical addresses.
The three major credit bureaus – Equifax, Experian, and TransUnion, do not provide tax lien information on credit reports. However, some lenders may pull tax liens as part of their own credit underwriting process, believing that a person with a tax lien is more likely to default on a loan.
SageStream provides consumer reports and credit scores to different types of companies including auto lenders, credit card issuers, retailers, and mobile phone service providers. SageStream is owned by LexisNexis Risk Solutions and considered consumer reporting agency.
This means SageStream is regulated by the Fair Credit Reporting Act and you are entitled to a free consumer report along with the right to dispute inaccurate information. You can also place a freeze your SageStream consumer report. Learn more about SageStream and how to place a freeze.
If you have a tax lien, it is important to understand how it may affect your credit. You can also contact the lender directly to see if they pull tax liens as part of their credit underwriting process. Lenders that consider tax liens in the approval process may still grant you credit, but you may have to pay a higher interest rate.