In a joint decision, the three largest credit reporting bureaus (Equifax, TransUnion and Experian) agreed to modify their rules about what to include in the credit score algorithm, The Wall Street Journal reported. Beginning July 1, 2017, certain tax liens and civil judgments will no longer be included in the calculation in some instances.
For many people hoping to take out a residential mortgage, maintaining a low credit score can be a source of stress or concern. In some cases, it just takes one financial mistake to have a major impact on your perceived creditworthiness. In other cases, a reporting mistake made not by the consumer but by a credit bureau can bring down someone's credit score.
Consumers have the option - and are encouraged - to refute mistakes or incorrect information on their credit reports. In fact, every year, thousands file related complaints against the three largest credit reporting bureaus. However, a large number of these people find the process for making corrections to be long, complicated and often fruitless, the Consumerist reported.
As a response to a growing number of disgruntled consumers who still have yet to see progress on correcting their scores, the three bureaus decided to change the parameters of when to include tax liens and civil judgments, and when to leave such information out.
Previous to this agreement, the criteria for including these financial events were simply name, birth date, social security number or address. Many bureaus report they only have one or two of these pieces of information, which can easily lead to attaching one person's tax lien to another person's report, if the two have similar names or addresses.
Going forward, the bureaus will only include tax liens and civil judgments if they include the person's name, address, and either a social security number or birth date. If fewer than three pieces of information are available, the event will not be included in the credit report. Additionally, any events that don't meet this criteria but are already included in consumers' reports will be removed.
Come July 1, an estimated 12 million Americans will see a bump in their credit scores as a result of this adjustment. Nearly 92 percent of these consumers will experience a minimal boost of around 20 points.
Depending on what their beginning score was, though, this could be enough. Many lenders reserve their best rates for people with scores of 740 or higher, while consumers with scores lower than 620 often experience difficulty getting approved for a loan at all, Bankrate reported.
Others may get a bigger upgrade of 40 points or more. Around 700,000 consumers are expected to get this advantage.
At first, a credit score increase might seem like a good thing, especially if you're in the market for a residential mortgage. However, some economists caution consumers and lenders alike to not take the change too seriously. A person whose score was lower before the new rules went into effect won't magically become more creditworthy just because the algorithm has changed. If consumers have an unrealistic vision of how large a mortgage they can afford, they could wind up with more debt than they can handle, and eventually default on the loan.
To avoid this, creditors and borrowers alike must carefully evaluate income and their ability to make monthly payments before agreeing to a loan amount and interest rate.
Academy Mortgage is one of the top independent purchase lenders in the country as ranked in the 2015 CoreLogic Marketrac Report. Visit www.academymortgage.com to find a loan, get a rate, or calculate your payment today.