This Regulatory Change Means a Credit Score Boost for 12 Million Americans

Tax liens and civil judgments probably won't adversely impact your credit score after July 1.

Mar 20, 2017 at 7:23AM

Whether you realize it or not, your credit score and credit report will play an important role in your life -- and I'm not just talking about your ability to get a home loan or open a new credit card. Though most Americans probably associate their credit scores with buying a home, their credit report can have so much more bearing than they realize.

Your credit report is a gateway to opportunity (or peril)

For example, your credit report can be a puzzle piece that determines whether you get the apartment or house you want to rent or the job of your dreams. It's commonplace for landlords to request a peek at your credit report. If they see any accounts sent to collections, repossessions, or a history of late payments, you could be denied an apartment or house to rent.

An explanation of the importance of your credit report.


Likewise, employers may request a look at a prospective employee's credit report to size up your character. If you have few black marks on your credit report, it could demonstrate to an employer that you're responsible. If you have multiple issues, it may be a red flag.

The same can be said for insurance companies and utility accounts. Insurers have found through statistical studies that consumers with poor credit are costlier than those with excellent credit, therefore people with bad credit tend to be charged higher premiums. Utilities, such as for water and electricity, can't deny service to a customer because of their credit history, but they can request a hefty deposit before starting service if your credit report is filled with black marks.

Traditionally, FICO scores are the most popular credit score measure. Ranging from a low of 300 to a high of 850, the higher your score, the more leverage you'll have when negotiating for a loan. Push your credit score into excellent territory (750 and higher) and you'll potentially even have lenders fighting for your business.

This regulatory change means a credit score boost for millions of Americans

According to data from FICO, which was aggregated by Bankrate, the average credit score across America hit an all-time high of 699 in April 2016. The approximate range of a "good" credit score is 700 to 749, putting Americans on the precipice of hitting the "good" credit score mark of 700 for the first time ever.  

However, a change in regulations expected to take effect around the beginning of July at the three credit reporting bureaus -- Equifax, TransUnion, and Experian -- will likely push the average American's credit score north of 700 .

A young woman holding a credit card and looking at her laptop screen in utter shock.


According to the Consumer Data Industry Association, which represents the aforementioned credit reporting bureaus, most tax liens and civil judgments (e.g., a creditor taking a borrower to court over an unpaid debt) will be removed from people's credit scores by roughly July 1. In order for a tax lien or civil judgment to remain on a credit report, it would have to list three data points: a person's name, their address, and either their Social Security number or date of birth. It's uncommon that tax liens or civil judgments contain all three or four of these data points, meaning an expected 12 million people will see these negatives removed from their credit reports. As a result, just under 11 million Americans are expected to see up to a 20-point improvement in their credit score, while around 700,000 Americans could see a 20-to-40-point improvement in their FICO score.

Why make the move now, you wonder? It just so happens that the Consumer Financial Protection Bureau released a report earlier this month highlighting a number of shortcomings at the three credit reporting bureaus. One of those deficiencies was a need to improve standards for public-records data by using improved identity-matching criteria.

Long story short, millions of Americans could appear considerably more creditworthy to lenders in the second half of 2017.


Three key credit score takeaways

This regulatory change is great news for about 12 million people, but it also brings a few important credit score points into greater focus.

First, given the number of changes that could be ongoing at the credit reporting bureaus in the weeks and months to come, it's important that you stay on top of your personal credit report and examine it for errors at least once annually. A 2013 Federal Trade Commission study found that one in five people have an error on their credit reports, which can drag down your score, hurt your ability to get a loan, and possibly increase your loan costs via higher interest rates and fees. You can view your credit report from all three bureaus for free once annually at Being proactive now can save a lot of hassle later.

A credit report that reads


Second, don't forget the basics of what FICO is looking for when calculating your credit score. Sure, 12 million Americans are set to receive the gift of a credit boost, but that still doesn't beat the basics that really dictate your FICO score. Though FICO keeps its precise formula a closely guarded secret, here are the five factors that matter, along with their relative weighting in determining your credit score:

  • Payment history (35%)
  • Credit utilization (30%)
  • Length of credit history (15%)
  • New credit accounts (10%)
  • Credit mix (10%)

As you can see, just paying your accounts on time and keeping your total credit utilization under 30% account for a combined 65% of your credit score. Beyond that, keeping good-standing accounts open for a long time, restraining yourself from opening too many new accounts, and proving your ability to handle both installment and revolving accounts make up the remaining 35%.

Finally (and this is for you investors out there), be mindful that this sudden increase in credit scores doesn't mean that consumers' credit habits have improved one iota. Consumers' credit habits are unlikely to change between today and July 1, meaning lenders could find themselves at a higher risk of loan defaults as these tax liens and civil judgments are removed from people's credit reports.


Sean Williams has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Jul 20, 2017 at 8:17AM

If you're searching for examples of capitalism sowing the seeds of competition, look no further than your credit score. FICO credit scores, issued by Fair Isaac Corporation, are just one brand of credit score among several clawing for a position as the best predictor of credit risk, although  FICO is the most popular.

No doubt the presence of competition has created confusion for borrowers, so let's take a moment to demystify a few FICO credit score essentials.

A paper copy of a credit report, under a calculator and a pair of glasses.


1. 90% of lenders use FICO scores

FICO scores have been around since 1989. Its early-mover advantage may explain why 90% of lenders rely on FICO for credit decisions, including to determine if you qualify for a low mortgage rate or a credit card.

2. FICO is the standard, but a few others are still important

Credit scores come in many forms and vary by provider, and you might be surprised by how many credit scores you have, each with its own criteria and associated costs to you. It's worth understanding the main players and connected relationships at play when it comes to credit scores.

FICO analyzes your credit data from the three major credit bureaus -- ExperianEquifax, and TransUnion -- meaning you have three FICO credit scores in total.

Further, in an attempt to dethrone FICO's decades-long dominance, the three credit bureaus teamed up to create VantageScore. Like FICO, it pulls data from credit bureau reports, and you get a VantageScore for each of the credit bureaus.

While each scoring model has its nuances, it's important to understand that they're all directionally accurate, even though the ranges and scores vary.


3. Poor credit scores could cost you hundreds of thousands of dollars

Credit scores make a huge difference to how much you pay on a mortgage. For example, say you're looking for a 30-year fixed mortgage for $200,000. When you look at current rates, you'll find that individuals with a low credit score of between 600 and 619 may end paying $101,735 more over the life of a modest 30-year mortgage, compared with those with excellent credit scores of between 760 and 850. That's college tuition for a child (or two), or, stated differently, $3,391 per year in additional costs. The culprit is a high mortgage rate, which can vary by more than 2 percentage points for excellent versus poor credit.

4. FICO scores range from 300 to 850

FICO scores have a standard range from 300 to 850, with the average American's score sitting at 689, according to MyFICO. FICO scores fall into five categories:

  • Poor: 579 and lower.
  • Fair: 580 to 669.
  • Good: 670 to 739.
  • Very good: 740 to 799.
  • Excellent: 800+.

This range differs from that of VantageScore models, which explains why a 700 FICO score can mean something different from a 700 VantageScore. Again, the important thing to know is both are directionally the same, even if the numbers vary.


5. Five underlying credit factors matter

Specific formulas behind FICO scoring models are shrouded in mystery, but five pillars are well understood and are weighted by importance. Payment history (35%), credit utilization (30%), average credit age (15%), new inquiries (10%), and account mix (10%) all feed into the FICO scoring formula. When looking to boost your credit score above 800, knowing the driving factors is crucial, and the easiest way to get excellent credit is to simply pay every bill on time and keep debt levels low. These two factors combined influence 65% of your credit score.

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Nathan Hamilton has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy

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