Come July, there may be more for you to celebrate than Independence Day. A policy change involving tax liens and civil judgments is expected to raise the credit scores of millions of Americans by 10 to over 40 points.What are Tax Liens and Civil Judgments?A tax lien refers to the government’s legal claim over your assets in the event that you fail to meet your tax obligations. A civil judgment is somewhat similar to a tax lien, but it requires you to pay a settlement as ordered by the court. As of now, both can have a negative impact on your credit score.Why is the Policy Change Happening?Starting July, 1, the three main credit bureaus in the country, namely, TransUnion, Equifax, and Experian, will delete approximately half of the tax lien and civil judgment data from consumers’ files. This is because a lot of the data is incorrect. The change, which is a part of the National Consumer Assistance Plan of the Consumer Financial Protection Bureau, is the result of a lawsuit that 31 state attorneys general brought against the credit bureaus.The credit bureaus were accused of “mis-linking” of data. This means that someone who has the same name as you may have his or her data included in your credit report, leading to unfair calculations of credit scores. Following the policy change, tax liens and civil judgment data will be disregarded if they do not contain sufficient personal information, including name, address, and either date of birth or social security number.How Borrowers and Lenders Will Be Affected?It is estimated that about five percent of Americans will have tax lien and civil judgment data removed from their files. According to FICO, they will see a 10 to 20-point bump in their credit scores, and a small group may see their scores go up by more than 40 points.As for lenders, the change is not welcome news. When tax lien and civil judgment data is wiped out, it means that some credit blemishes will not be reported. This makes it difficult for lenders to determine the actual creditworthiness of loan applicants. However, those lenders who are willing to offer home loans, auto loans, and personal loans for bad credit borrowers will not be significantly affected.If you are one of those who will benefit from the policy change, you should have an easier time getting approval for a loan. However, the change may be too small to have a real impact on interest rates.
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