Avoiding public records on your credit report
Many kinds of entries on a credit report can lower your credit score, but some are much more harmful than others. The entries that do the most damage, and that tend to keep your score down for extended periods of time, are what lenders call derogatory events—or just-plain bad ones. (For a refresher on credit reports and how they are organized, see our Anatomy of a Credit Report series.)
Lenders view derogatory credit-report entries as evidence of mismanaged debt. That is why credit-scoring models typically treat them as grounds for steep, long-lasting score reductions. That is also why you should avoid them at all costs. This four-part series of articles is designed to help you “steer clear” of derogatory events, examining them in detail so you know what to avoid—and what the consequences could be if you don’t. We’ll cover the three categories of information that can be considered derogatory: This first installment examines public records. Part 2 will look at credit-report narratives, and part 3 and part 4 will look at the somewhat complicated topic of non-performing tradelines—a fancy term for accounts that aren’t being paid as agreed.
By John Ulzheimer
The Ulzheimer Group
Public records are just that—public. They contain information anyone can have for the asking, and believe me, the national credit reporting companies (CRCS)—Equifax, Experian, and TransUnion—most definitely ask. And while there are many different types of public records, only a limited number might appear on a credit report: tax liens, judgments and bankruptcies.
Unlike information related to your personal debts, which lenders report to the CRCs proactively, public records are gathered by the CRCs using public record vendors and other online sources of the information, such as PACER. PACER stands for Public Access to Court Electronic Records and provides online access to a variety of court records, including those for bankruptcy courts. This is how bankruptcies make their way onto credit reports.
Any public record that appears on a credit report is considered derogatory or bad. There are no good or positive public records on credit reports. As such, any public record on your credit reports can lead to lower credit scores because those public records are predictive of elevated credit risk and indicate some sort of mismanagement of personal liabilities. You would do well to avoid them at all costs.
A tax lien is an order imposed by a court that entitles a taxing entity such as a city, town, or even the federal government to collect the amount it is owed upon the sale of an asset, such as a piece of real estate. A tax lien is typically put in place only after the taxing entity fails in prolonged efforts to collect unpaid taxes. Despite a prevalent myth floating around in the credit world that the IRS sends tax lien information to the CRCs, neither the IRS nor any other taxing entity actively reports tax liens to the CRCs. The CRCs know where to find them, however, and tax liens will show up on your credit report—to the detriment of your credit score.
A judgment occurs if you are sued and you lose—either because a judge or jury returns a verdict against you or because you don’t show up for your trial date. The court is said to have rendered a judgment against you. Unlike bankruptcies and tax liens, judgments don’t necessarily indicate mismanagement of your debts. They can, however, signify substantial financial obligations—in cases where you’re ordered to pay compensation or damages, for instance. Not all judgments appear on your credit report, but many do—and when they do, your credit score always suffers.
Public records normally remain on a consumer’s credit report for seven to 10 years, but there are some exceptions to this rule. For example, if you are able to get your tax lien withdrawn, the CRCs will remove the reference to the prior tax lien immediately because they do not report withdrawn liens as a matter of policy. Judgments remain on credit reports for no longer than seven years from the date on which the judgment was filed. And finally, bankruptcies can remain on credit reports no longer than 10 years.