Three major credit-reporting firms, including Equifax, Experian and TransUnion, will soon be removing many tax liens and civil judgments from consumer reports, the Wall Street Journal reports, citing data from the Consumer Data Industry Association. Around 12 million people, or six percent of the population, will see increases in those scores as a result of the change, according to FICO, the business which measures credit on a scale of 300 to 850 points (i.e., your 'FICO' score.)
Credit reports determine whether (and how much) consumers can borrow, and often influence other decisions, like whether you can rent an apartment or get a job. For entrepreneurs, the implications are just as great: Personal credit is often considered as part of your application for a small business loan, along with other risk metrics such as income tax returns and profit and loss statements.
A rosier credit score could certainly help small businesses secure the capital they need to grow. Small business loans are historically very competitive, with big banks approving just 24 percent of small business loans in January 2017, while small banks approved just under half (48.9 percent) of loans, according to the monthly small business lending index from Biz2Credit, an online small business lending platform. The U.S. Small Business Administration has advised that if your personal FICO score falls below 680, you should take some concrete steps to improving it.
The decision by the credit bureaus is part of a broader effort to limit negative information on credit reports, as government agencies continue to crack down on lending practices. A recent report from the Consumer Financial Protection Bureau, for instance, urged credit bureaus to improve their data accuracy. (The Bureau says it has already handled more than 185,000 credit-reporting complaints so far this year.)
Of course, while removing tax liens and civil judgments could spur lending activity, analysts warn that the lenders should continue to be leery. "It's going to make someone who has poor credit look better than they should," said John Ulzheimer, a credit specialist and former manager at Experian and FICO, in an interview with the Journal. "Just because the lien or judgment information has been removed and someone's score has improved doesn't mean they'll magically become a better credit risk."
Alternative lending firms, including On Deck Capital and Prosper, for instance, already consider factors beyond a credit score when determining a borrower's risk--such as personal habits, income, employment status and length of credit history.