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RE Investors and Business Owners: Will You Soon Cash in On a Higher FICO Score?

I recently wrote about FICO score changes related to medical debt collections in the article title “Are You a Credit Challenged Entrepreneur?” Fair Isaac, the company who creates FICO scoring models, has stopped including in its FICO 9 score calculations any record of a consumer failing to pay a medical bill if the bill has been paid or settled with a collection agency.

Now, there are even more FICO credit score changes to take effect July 1. Real estate investors and small business owners who must guarantee loans may see their FICO scores automatically increase before the end of Summer 2017.

How Will This Happen?

When our former company, The Credit Alternative, LLC, offered credit improvement services, we reviewed countless numbers of credit reports that did not include updated information such as a consumer had satisfied a judgment or tax lien. Also, we reviewed credit reports that included a judgment or tax lien that did not belong to the consumer.

Soon, the 3 major credit bureaus - Equifax, Experian, and TransUnion - will no longer include on credit reports most judgments and tax liens if this data doesn’t include the consumer’s full name, current address, and either their Social Security Number or date of birth. This will take effect July 1, and, help to ensure that a consumer’s identification in the data is accurate and current. Many liens and most judgments don't include all of that data, in part because Social Security numbers are often redacted for security reasons, according to the Consumer Data Industry Association. This change will apply to new tax liens and judgments as well as existing data in the reports. Additionally, the data won't be included without courthouse visits at least every 90 days to obtain newly filed and updated public records.

How Will Investors and Small Business Owners Benefit From the Upcoming Changes?

According to The Wall Street Journal, up to 12 million consumers could see their credit scores boost to 40 points or more by the removal of judgments and tax liens.

If your credit score increases north of 680 with the upcoming change, traditional bank financing can be an excellent way to secure capital at a low interest rate. If you’re seeking longer terms, you’ll have better options. This is critical for investors whose goal is to buy and hold property for positive cash flow. And, for small business owners, this will allow them to maintain lower overhead costs and get a longer term to pay the loan back as they work to increase business profits.

Are There Any Concerns With the Upcoming Changes?

You better believe there are concerns!

John Ulzheimer, a credit specialist and former manager at Experian said, “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. It’s going to make someone who has poor credit look better than they should.”

Lenders price their loans based on risk. They can afford to take a risk and offer low interest rate loans to investors and business owners who have good credit because they can project a low default rate. However, someone with poor credit is much more likely to default, so lenders price their loans higher to account for the higher risk.

According to the Consumerist, LexisNexis Risk Solutions found that consumers with liens and judgments are twice as likely to default on loan payments.

So, here’s the question: Will investors and business owners who are good credit risks end up paying more for financing?

Will This Upcoming Change Be Your Second Chance?

If an accurately reported judgment and/or tax lien is removed from your credit report after July 1, do more than count your blessings. Develop a plan, now, to avoid future judgments and tax liens. Become a good credit risk!