Millions of borrowers will soon get a boost to their FICO scores without having to lift a finger. But the reason for that boost is worth a closer look, especially for those who rely on FICO scores and personal credit reports when making important business decisions.
Credit Errors Commonplace
The three main credit reporting agencies – Equifax, Experian and TransUnion – recently decided to remove many tax liens and civil judgments from individual borrower’s credit reports. According to a March 12 article in the Wall Street Journal, the move is due in part to regulatory concerns related to widespread complaints about the agencies reporting inaccurate information. In fact, a 2013 Federal Trade Commission study found that one in five consumers had an error on at least one of their three major credit reports, the Journal reported.
Under the credit reporting agencies’ new guidelines, slated to go into effect around July 1, only liens and judgments listing the individual’s name, address and Social Security number or date of birth will be included. This will surely help eliminate mistakes on some reports, but many liens and judgments don’t meet this criteria, meaning that legitimate liens and judgments also will be excluded from credit reports in some cases. As a result, a borrower owing tens of thousands of dollars or more in tax liens, for example, might soon be able to get a loan for which he or she previously would not have been eligible. This may be good news for some borrowers with large amounts of unpaid liens or judgments, but it adds risk for lenders, which in turn could make borrowing more expensive for their other customers. After all, it’s not hard to imagine lenders increasing their rates and fees to help cover the risk that more of their loans go into default.
An Added Risk to Business Partnerships
This change also will affect others who rely on credit reports, such as those who use them in the course of conducting due diligence on prospective business partners. They’ll still be able to see how much a person owes in credit card debt, mortgages, student loans, etc., but pieces of the puzzle may be missing.
Also as a result of the changes, around 700,000 people will see improvements to their FICO scores of 40 points or more while nearly 11 million people will see smaller gains of 20 points or less, according to FICO and the Wall Street Journal. Overnight, financial profiles will improve without these individuals repaying a dime of the debt they owe.
We routinely search for liens and judgements in the course of doing background investigations and I can tell you from experience that even when someone appears to have an otherwise solid financial profile, there are sometimes skeletons lurking in the closet. I have investigated corporate executives with million-dollar homes who, for whatever reason, owe or have owed tens of thousands of dollars in unpaid federal, state and/or local taxes or civil judgments. In some cases, this may be due to sloppy record-keeping on the individual’s part, such as late payments on a property tax bill. But other times it’s a sign of deeper financial troubles.
In essence, this move by the major credit reporting agencies creates more uncertainty for those who rely on their services to make financial decisions involving individuals who are unfamiliar to them. The well-worn phrase “let the buyer beware” comes to mind. Only this time it is the lender or potential business partner who will have be more vigilant.