If you’re wondering if tax liens impact your credit score, the answer is no. They used to, however, up until recently. In 2017 and 2018 there were some changes to what the three major credit reporting bureaus – Equifax, Experian, and Transunion – show on their credit reports. Here’s a summary of what you need to know about tax liens and your credit score:
Important Update: Bureaus Offer Free Weekly Reports Through April 2022
In light of the unprecedented financial crisis caused by the COVID-19 pandemic, the credit bureaus have expanded free credit report access. You can now download your credit report from each bureau once per week through annualcreditreport.com.
We recommend taking advantage of these free weekly reports to check your credit often during this crisis, so you can avoid mistakes.
What is a tax lien?
A tax lien is the government’s legal claim against your property when you fail to pay a tax debt. The lien protects the government’s interest in your property, including real estate, personal property, and other financial assets. The most common are federal tax liens, but you could also have a state tax lien.
In order to get a tax lien, the IRS assesses your liability and sends you a bill. If you don’t pay the full amount of the bill (debt) in time, then the IRS will issue a Notice of Federal Tax Lien. A tax lien is different from a levy. A tax lien secures the government’s interest in your property when you don’t pay your tax debt. However, a levy is when they actually take the property to pay a tax debt. If you don’t pay or make arrangements to settle your tax debt, the IRS can levy, seize, and sell any type of real estate or personal property that you own or have an interest in.
Changes to tax liens on your credit report
Two major changes happened recently related to tax liens and credit scores.
Change #1: Reporting rules for public records
The first update happened in July 2017 when the criteria for tax liens and civil judgments appearing on consumer credit reports changed. This update is part of the National Consumer Assistance Plan (NCAP) initiative the three major credit bureaus originally announced in 2015. The goal is to make credit reports more accurate and make it easier for consumers to correct errors.
There were various components of the NCAP that rolled out at different times. This particular update meant that beginning July 1, 2017, all civil public records require the inclusion of a name, address, and a Social Security number or date of birth before appearing on credit records from the three major credit reporting companies. The credit bureaus were also required to refresh the information at least every 90 days. So, if the public records data didn’t meet these criteria, they could no longer be included on a credit report.
How did the change in reporting affect consumers’ credit scores?
While credit scores themselves don’t appear on a credit report, they are determined using some of the information on your credit report. The removal of negative information usually means a credit score increase for Americans who previously had tax liens on their credit reports.
After the update, some people saw their score increase a small amount. However, the Consumer Financial Protection Bureau (CFPB) conducted a study to analyze the full impact. They found that only 4% of people with civil judgments or tax liens on their credit report saw a credit score increase enough to move them into a better credit scoring band (e.g. from subprime to near prime or near prime to prime). So, the impact of this update was minimal with only 0.24% of all U.S. consumers seeing a significant change in their credit scores.
Change #2: The removal of tax liens on credit reports
More recently, as of April 16, 2018, tax liens were removed completely from credit reports. Director of Public Education for Experian, Rod Griffin explains, “Both paid and unpaid tax liens were removed from Experian credit reports in the spring of 2018. Tax liens no longer appear in credit reports, and therefore, do not influence credit scores.” Griffin adds, “That doesn’t mean the tax authorities won’t attempt to collect payment, it just means they are not part of your credit history anymore.”
Federal and state tax liens are included in this, so neither one will bring your credit score down any points. If you had tax liens on your credit report, you likely saw a slight increase in your credit score after this update.
What public records DO impact your credit score?
With the changes in 2017 and 2018, tax liens now no longer appear on your credit reports. Bankruptcies, however, still show up in the public records section of your credit report. The amount of time a bankruptcy stays on your credit report depends on the type of bankruptcy. A Chapter 7 or Chapter 11 bankruptcy stays on your credit report for 10 years. A Chapter 13 Bankruptcy stays on for 7 years. The bankruptcy will impact your credit score for as long as it appears on your credit report. Bankruptcy is a major financial decision and can impact many areas of your life. (Read more here to learn about bankruptcy and how it can affect you.)
Do property liens affect your credit score?
A tax lien is one type of property lien. So, like tax liens, property liens don’t impact your credit score because they don’t show on your credit report. A property lien can also include a judgment lien on property someone owns. This happens in a civil court case when someone loses a case and owes money for items such as credit card debt, child support, or unpaid medical bills.
And while property liens don’t appear on your credit report, they are a matter of public record. So, they can be checked by anyone via the county assessor or recorder office where your property is located. That means that if a lender checks public records, a property lien could still affect your ability to get approved for a loan, even though the lien doesn’t appear on your report. Lenders have different lending standards, so it depends on what information a lender reviews during underwriting.
Why you still want to pay off any tax liens
Tax liens can still have some negative repercussions. Sonya Smith-Valentine, Esq., financial confidence expert and owner of Financially Fierce, LLC, explains, “A tax lien can still impact you even if it no longer appears on your credit reports, especially if you’re trying to get a mortgage. A LexisNexis study found that mortgage borrowers who have a tax lien are 5.5 times more likely to go into pre-foreclosure or foreclosure.”
“Therefore, mortgage lenders may still want to see tax lien information when reviewing a mortgage application. Lenders have other ways of finding out about tax liens even though they’re no longer on credit reports, such as a lien and judgment report available to financial institutions,” Smith-Valentine adds. Tax debt is something that won’t just disappear, so it’s important to take care of it as soon as possible.
While tax liens may have several negative financial implications, they won’t impact your credit score. Learn more here about what does appear on your credit report so you can understand how to better manage your own credit score.
Article last modified on September 30, 2022. Published by Debt.com, LLC