Credit Scores Expected to Rise, Some Artificially

Credit bureaus Experian, Equifax and TransUnion announced they will remove some tax-lien and civil-judgment data from credit reports.

They will remove records that don’t include a person’s name, address and either a social security number or date of birth.

This will be a welcomed by many consumers. About 700,000 people will see their credit scores rise by 40 points, according to LexisNexis Risk Solutions.

It’s likely to be welcomed by dealers as well. Lenders tightened credit for higher risk customers in last year’s fourth quarter, as loans to subprime and deep subprime customers dropped 5.6%, Experian says.

Raising customer credit scores will put more customers into prime and super prime credit tiers and likely will result in more car-loan approvals. So, on the surface, the decision to drop some tax-lien and civil-judgment information appears to be a win-win.

But there is a potential downside, particularly from a lender’s perspective. Removing such data could artificially inflate consumer credit scores, putting more loans at risk.

Payment delinquencies are currently rising slightly, with 60-day delinquencies jumping from 0.71% to 0.78% in 2016’s last quarter. While this still is relatively low, lenders never want to see delinquencies escalate. Giving loans to consumers who should have lower credit scores could cause a rise in delinquent payments.

The real issue highlighting this decision is the importance of accurate lending-industry data. The legal industry, because it is a patchwork of local, state and federal courts, lacks the infrastructure to compile tax-lien and civil-judgment data into a centralized database. The result is often manual tabulation by court data aggregators. Despite their best efforts, the current system is susceptible to human error and can lead to reporting inaccuracies.

An inaccurate credit score that works against a consumer can add higher interest rates to their loan, or worse, deny a loan all together. That’s bad for everyone.

But, an inaccurate credit score that ignores real risk can imperil lenders. That has negative long-term impacts as well. The subprime mortgage crisis that led to the recession nearly a decade ago, while an extreme example, is a painful reminder that providing loans to unqualified consumers can lead to disaster.

The credit bureaus should be applauded  for taking actions that can remove an unjustified negative mark on a credit report. If managed correctly, it could positively affect auto sales.

But the legal system needs to find ways to upgrade its technological infrastructure to improve accuracy of the information it provides. This will be the best way to ensure consumer and lender interests are protected.

Ken Hill is the managing director of 700Credit.