About 21 percent of consumers have damaging mistakes in their credit reports, and the new rules should cut down on errors involving liens and civil judgments.
Consumers who are dogged by poor credit scores — and have trouble getting credit cards or loans as a result — will soon get some relief.
On July 1, the three credit-reporting companies stopped using some records that are especially damaging to credit scores: tax liens and civil judgments.
So if someone has gone after you in court for failing to pay what you owe, or a government has placed a lien on your assets, those records will likely disappear from your credit report. An estimated 12 million people could be affected by the changes.
Most Americans don’t have such a troubling past dragging down their credit history. But the new rules could also offer some benefit to people with unblemished pasts. According to the Federal Trade Commission, about 21 percent of consumers have damaging mistakes in their credit reports. So you could be meticulous about paying back every cent you owe on time and still have false information placed on your credit history by the computers that generate the information.
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The new rules should cut down on those mistakes, at least when it comes to liens and civil judgments. The three reporting companies — TransUnion, Equifax and Experian — will no longer use those records when evaluating your credit unless they can match your name, address and either your Social Security number or birth date to the records.
Fair Isaac Corp., which blends credit histories into a FICO score for each individual, estimated in a recent report that about half of tax lien public-record data will not be usable under the new rules. On the other hand, FICO said the new rules probably will not make a major difference in credit scores anyway.
Typically, 92 percent of people with liens and judgments have other derogatory information in records that raise red flags, according to FICO. Bankruptcy records will still be used.
Consumer advocates have long complained that many Americans are unfairly tarnished by credit reports that are wrong. The July changes are an outgrowth of a settlement involving 31 states attorneys general challenging errors in credit reports.
Errors are frequent because computers often match the wrong information to the wrong name; especially when two people have the same or similar names.
Bruce McClary, a spokesman for the National Foundation for Credit Counseling, said that as a credit counselor he observed two women struggle for almost a year to get one item on a credit report changed.
One digit in a Social Security number had been used incorrectly, so that an account that belonged to one woman was recorded instead as an account held by the other woman.
Payments on the account were up to date, and even though the two women worked together to get the mistake fixed and credit histories corrected, the process was grueling, he said.
“There’s no guarantee of a rosy ending,” McClary said.
The credit-reporting system is supposed to be an early-warning system for banks and other entities who are considering doing business with an individual and want to know if that person can be counted on to pay their debts. Sometimes potential employers request credit reports, although some states have stopped that practice. Landlords often request credit reports before renting to a tenant. Banks rely on credit reports while also doing additional research before granting a mortgage or other loan.
But while credit reports are designed to use a person’s past to predict the future, critics have said the system is flawed. For example, people often wait to pay medical bills while trying to resolve questions over payments and insurance coverage, which in the past has dinged an individual’s credit report.
Under a new change that’s to be adopted soon by the three credit-reporting agencies, unpaid medical bills won’t be reported until they are 180 days past due.
Because mistakes are so frequent, and the ramifications so serious for people who need or want to borrow money, McClary suggests people review their credit report at least once a year and demand changes if errors appear. He suggests that people ask for a free credit report every three months from one of the three credit-reporting bureaus, so that by year-end all three have been reviewed. This should be done through www.annualcreditreport.com, he said, which should not be mistaken for the multitude of sites that charge for credit scores.