Experian, Equifax and TransUnion will now exclude tax liens from credit reports. These liens can really hurt your score, so this removal will be beneficial to those who have them—which is about 5.5 million people!
Today I’ll cover what exactly a lien is, plus some other ways you can help your credit score.
What’s a lien?
A tax lien is placed on your (or your businesses) property when you fails to pay personal or business taxes. This property can include cars, your home, or your business.
How a lien can affect your credit
In the past, tax liens appeared on credit reports and showed potential lenders that you were a bigger risk than people without them.
It’s difficult to determine exactly how much a tax lien can affect your score, but it’s considered a severe mark against you. According to John Ulzheimer, a credit expert who has worked for FICO and Equifax, “A tax lien is considered a severe derogatory entry, just like bankruptcies, judgments, collections, charge-offs and repossessions.”
Now you can see why the removal of these liens is such an important move.
Unfortunately, this change might not help everyone. If you’ve already got a strong credit score and the only problem is the lien, your score may not improve by much. The Consumer Financial Protection Bureau (CFPB) found that when liens were removed from credit reports, the following changes occurred:
- 75 percent remained in the same credit score band
- 17 percent moved to a higher credit score band
- six percent moves to a credit score band of prime or above
- 66 percent stayed subprime or deep subprime
Why the change?
You’re probably wondering why this change is going into effect. Well, the Consumer Financial Protection Bureau ran a study and found significant problems with credit reporting. There’s a history of inaccuracy when it comes to credit reports—in fact, it’s the top reported issue.
These issues come about because lenders and debt agencies who report to credit bureaus have no real incentive to be accurate with their information. That’s why it’s important to constantly monitor your credit to check for errors.
So, in the hopes of improving accuracy when it comes to reporting, most of the population will have a judgment or lien removed from their credit file.
How to get rid of a lien
Pay off your debt
As with any debt, the easiest way to get a negative mark off your report is to pay off your debt. If you can’t pay your taxes on time, set up a payment plan with the IRS—that will ensure that you’re making timely payments and a tax lien won’t appear on your report.
Apply for a withdrawal
A withdrawal will remove the public notice of the lien, but you’re still liable for any unpaid tax debt. You’ll need to fill out IRS Form 12277.
You may be eligible for withdrawal if you’ve kept up with filing all tax returns on time for the past three years, and you’re current on other tax payments.
You may also qualify if you owe $25,000 or less and you’ve set up a direct debit installment agreement where you’ll pay back the debt within 60 months or before the collection statute expires (whichever is earlier).
A subordination doesn’t get rid of the lien, but it allows creditors to move ahead of the IRS, which can make getting a loan or mortgage easier for you—but if you can’t pay taxes, chances are you should not be looking to buy a home or take out a significant loan.
Read the IRS’s instructions for applying for a subordination.
Discharge of property
A discharge of property removes the lien from a specific asset or property (your house, car, etc.) However, the rest of your property and assets remain subject to the lien.
Applying for a discharge of property typically allows you to sell your property in order to receive the funds to pay off the IRS.
Here’s the IRS’s instructions for applying for a discharge of property.
How else you can raise your credit
As I said earlier, not every credit score will benefit from this change. If you’re one of those folks, you’ll need to find other ways to improve your credit.
Luckily, we’ve talked about this at length in the follow articles:
- Do-It-Yourself Credit Repair: Fix Bad Credit On Your Own In 6 Easy Steps
- 13 Helpful Tips For Maintaining A Good Credit Score
- How To Build Credit The Right Way
Tax liens can seriously affect your credit, but thankfully, the Consumer Financial Protection Bureau has decided to remove all tax liens from credit reports, which will raise many people’s scores.
However, this doesn’t mean you are off the hook. You’ll still need to pay your taxes—and all other debts—in order to improve your credit score.
- What’s Your Credit Utilization Ratio And How Does It Affect Your Credit Score?
- How Credit Works: Understand The Credit History Reporting System