In response to regulatory pressure and settlement of lawsuits with 32 states the Big Three of credit reporting – Equifax, Experian and TransUnion – have decided to omit certain negative items from the credit reports of consumers. Examples include:
- Tax-lien and civil-judgment data that don’t include a complete list of at least three data points (a person’s name, address and either a SS# or DOB). Surprisingly most liens and judgments don’t include all three or four pieces of basic information.
- Non-loan related items that were sent to collections firms. Common examples are gym memberships, library fines, traffic tickets and medical-debt collections.
The changes should help the roughly 12,000,000 U.S. consumers – about 6% of the total U.S. population that has FICO credit scores – who will see increases of 20-40 points. They will appear to be better credit risks…but they aren’t! Simply removing negative data doesn’t make someone a better credit risk. Closing our eyes to the problem doesn’t make it go away.
Conversely the changes will likely increase risks for lenders unable to accurately assess borrowers’ default risk. Consumers with liens or judgments are twice as likely to default on loan payments according to LexisNexis Risk Solutions which provides public-record information to the Big Three.