If you’ve heard that some people might get a magic boost to their FICO credit scores in the 10-point range — without having to do anything — you’re right. But hundreds of thousands of consumers’ increases will be much larger.
According to a massive new study of 30 million credit files just completed by score developer FICO, many Americans will experience score bumps in the coming months, mainly modest increases of less than 20 points. But hundreds of thousands of the increases will be super-sized — in the 40 to 60 points and higher range. The vast majority of consumers, however, will see no change in their scores.
Some basics here: The changes are tied to forthcoming policy initiatives at the three national credit bureaus — Equifax, Experian and TransUnion. As part of an agreement with a group of state attorneys general, in early July the bureaus will stop collecting and reporting public information on virtually all civil judgments (monetary damages awarded by courts against the losing parties in civil disputes) and roughly half of all tax liens (levies against properties when taxes go unpaid). The bureaus have determined that the accuracy of the public records in both these areas does not meet their quality standards. So they are going to remove them from the credit reporting process altogether.
Since these two items traditionally have counted as serious negative indicators of a consumer’s creditworthiness, they depressed credit scores. But because there were troubling error rates in public records data — the names on consumers’ files were mixed up, Social Security numbers omitted — some Americans’ credit scores were lower than they should have been. It was unfair, consumer advocates argued, and the depressed credit scores may have kept qualified people from getting mortgages to buy houses.
But the unanswered questions in this whole issue have been: How many consumers’ credit files contain civil judgment or tax lien entries, erroneous or otherwise? How many have credit scores that are depressed enough to keep them out of home buying range? And how big a worry might this be for mortgage lenders since they now could be deprived of information they previously considered important? After all, though many consumers’ credit files have erroneous information in them about judgments and tax liens, other consumers do in fact have legitimate judgments and liens filed against them. But starting in July, lenders won’t see them anymore on credit reports, and some applicants’ credit scores may be inflated artificially.
Now to FICO’s groundbreaking study. Examining giant samples of credit files supplied by the credit bureaus, researchers estimated that between 12 million and 14 million Americans have judgments or tax liens in their current files that could be affected by the changes. When these items are purged, their FICO scores tend to jump. (FICO scores range from 300 to 850, with higher scores indicating a lower probability of default.)
Most of the affected consumers’ files saw increases in scores between 1 and 19 points — not a big deal. But between 1 million and 2 million consumers appear to be in line for score boosts of 20 points to 39 points, and 300,000 or more could see FICO increases of 60 points or higher, simply because negative information will be expunged from their files. Between 93 percent and 94 percent of all Americans have no tax liens or judgments in their files and will see no change in their FICOs — at least not attributable to the new credit bureau policies.
So what does this mean for prospective home buyers? It depends. FICO researchers found that most people with judgments and liens — 92 percent — also have other negatives in their credit files. Their current median score is 565, well below what’s needed for most mortgages. Adding on a few points won’t help them much — nor will they likely pose major problems for lenders.
Among the biggest gainers, according to Ethan Dornhelm, FICO’s analytic science director, will be people who already have solid FICO scores — they pay their bills on time — but somehow have judgment or lien entries in their credit reports. Once these are expunged, a fortunate 700,000 of these folks nationwide who have no other negatives in their files should see their FICO scores soar by 40 points or more. And that could open the door for them to lower interest rates and better mortgage terms, beginning this summer.
One of them could be you. Check out your credit reports and see what might be lurking there.
Kenneth Harney is executive director of the National Real Estate Development Center.