How A Tax Lien Effects Your FICO Score

A credit rating is based on several variables, and knowing them may help you find ways to off-set the impact of a tax lien.

Read full question
Bill's Answer: Answered by Mark Cappel

Because your second question requires a shorter answer, let me answer it first. Updating or correcting inaccurate information in your credit history is something you can repair on your own. Write a letter detailing the inaccuracy to the reporting company. Send the letter and copies (not your originals!) of any documents supporting your claim to the credit-reporting agency. All three agencies allow you to do this through their Web sites. However, if you need to send hard copies it's better to use regular postal mail.

Credit agencies are required by law to investigate the item in question, usually within 30 days. They must forward all information to the reporting creditor and if they cannot verify the accuracy of their report or the creditor does not respond, the report will then be changed and updated to reflect the data provided.

The company must then notify you in writing of the change as well as provide you with an updated credit report.

It's important to note that if there is an inaccuracy on Experian (for example) there is likely a similar one on TransUnion and Equifax. Each company must be notified separately for each item.

Now let's talk about a tax lien's effect on a FICO score. While no one can tell you precisely how much your score will be impacted -- because 1) the Fair Isaac Company, the producer of FICO scores, doesn't release the algorithm it uses for scoring, and 2) the lien will be factored in with everything else contained in your credit report -- but a tax lien usually places a large drag on one's credit.

That said, your credit rating is calculated based on several variables, and knowing them may help find ways to off-set the negative impact of the lien.

The principle factors in credit scoring are:

1) Payment history, which counts for approximately 35% of your score, is the most heavily weighted factor used in calculating your credit score. Consistently paying your bills on time has a positive influence on your score, while late or missed payments will hurt you in this area. If you have delinquent payments, the older the delinquency the less the negative impact on your score will be. Collection accounts, tax liens, and bankruptcy filings are also taken into consideration when analyzing your payment history.

2) Total debt and total available credit, which counts for about 30%. This section looks at how much debt you have compared to the total available credit on your accounts. If all of your accounts are maxed out, you will be considered a poor credit risk, because it appears that you are struggling to pay off the debt you have already incurred. If your account balances are relatively low compared to your available credit, this part of the risk analysis should help your overall credit score. The score calculation also looks at these two factors independently. Having too much available credit, whether you have used it or not, could hurt your credit score, as statistical studies have shown that people with excessive amounts of available credit are a higher credit risk. Unfortunately, the bureaus do not define exactly what they consider excessive, so best tip is to use credit conservatively and to keep your debt to credit limit ratio low.

3) Length of positive credit history, which counts for about 15%. The longer you maintain accounts in good standing, the better your score will be. This shows that you are able to make a long-term commitment to a creditor and are consistently responsible about making your payments. If you have accounts with long history (five or more years) and no missed payments, you should keep these open and paid off.

4) Mix of types of credit, which counts for approximately 10%. Having several different types of credit, such a credit cards, consumer loans, and secured debt, will have a positive influence on your credit score. Having too much of one type of credit can have a negative impact.

5) The number of new credit applications you have recently completed, which accounts for about 10% of your score. Applying for too much new credit in a short time period makes indicates that you could be credit risk, as you may be desperately trying to keep your head above water. The models make an exception for people who are shopping around for a loan, so if you are simply applying to see who can give you the best rate on a new loan, you need not worry too much about damaging your credit score.

If you would like to learn more about FICO score calculation, see All About Your FICO Score. For more information on building credit, visit Credit Building From Scratch.

I hope this information helps you Find. Learn & Save.

Best,

Bill

www.bills.com/

Rate this article
Not helpful
Awesome

Comments (12)


Barbara M.
Mims, FL  |  April 02, 2014
I had a $24,000 IRS debt for year 2007, which I just paid off in full. They adjusted to $20,400. I paid adjusted amount, it hasn't been a month since paid. Should I file Form 12277 right away or wait?
Bills.com
April 08, 2014
If you can prove that the debt has been brought to a $0 balance, then file the Form 12277.
D J.
Folsom, CA  |  March 19, 2012
I just recently learned while buying a home that 2 years ago a state I previously lived in 10 years ago filed a tax lien on me. For a tax dispute that I thought was settled in 2003. The lien was entered and release in 2010. Since it has been released who do I get it off my record?
Bills.com
March 20, 2012
Contact the IRS. File IRS Form 12277 Application for Withdrawal of Filed Notice of Federal Tax Lien. Explain why you want the released lien taken off your tax report.

As is stated on the Form 12277, "If a determination is made to withdraw the NFTL, we will file a Form 10916(c), Withdrawal of Filed Notice of Federal Tax Lien, in the recording office where the original NFTL was filed and provide you a copy of the document for your records."

"If the determination is made to not withdraw the NFTL, we will notify you and provide information regarding your rights to appeal the decision."

"At your request, we will notify other interested parties of the withdrawal notice. Your request must be in writing and provide the names and addresses of the credit reporting agencies (italics added), financial institutions, and/or creditors that you want notified."
Jesse S.
Columbia, SC  |  June 24, 2011
I have a tax lien listed on my record that was released when I sold my house for a loss in FEB 2011. However I do not see anything that says released or settled on the report. I am diputing this now. Once the reports accurately reflect that the lien was released should my credit score go up? Or will the fact that I ever had a tax lien keep dragging my credit down for 10 years? FYI the tax lien was for 12,000 and I currently am paying monthly to the IRS. The amount owed is now 7,000 and will be paid off in about 1.5 years. But none of that info is on my report.
Bills.com
June 24, 2011
When the IRS files a lien, it is a personal tax lien that is against you. It affects property that you, encumbering it so that you cannot sell or refinance it, without satisfying the lien.

I am not sure that you are correct that the lien against you was released. lYou may have received a lien discharge, where the IRS removes a Federal Tax Lien from a specific property. Sometimes, the IRS will not release a lien until the underlying tax debt is paid. However, it is possible that they released the lien, once you agreed to the installment agreement. If you are certain that the IRS released the lien, you can contact the three credit bureaus to have them update the status of the lien. It can still show on your report, with a new notation showing the date the lien was released. Once it is paid, it can be noted that the lien is paid. The effect on your credit score continues, but decreases in impact the more that time passes, once the debt can be shown to be at $0 balance.

The IRS does not update the credit bureaus regularly, the way a credit card company or mortgage lender does. That is why you don't see infomration on your report showing that the tax debt balance is being paid down. You can read more about IRS liens at the IRS Web site.
Avatar
Bills.com
May 20, 2010
What do you mean, "...push the big 3 to reflect a settled tax lien and apply for the loan at that point"? Please clarify.
J .
May 20, 2010
I am shopping for a mortgage loan and found out that an old state income tax bill had been placed as a lien on my residence. I have settled the bill with the state, but am now faced with choice of taking a loan now with a less desirable credit number,or push the big 3 to reflect a settled tax lien and apply for the loan at that point. Thoughts?
Avatar
Bills.com
April 29, 2010
FICO keeps their formula and the calculus behind their FICO score proprietary (read: they don't publish changes or updates). We do not believe that they have changed their model, which means that many people will indeed see declines due to the fact that a lower credit limit will make the utilization ratio look much worse, even though people will not have charged any more or carry larger balances, as you suggest.
Allan .
April 19, 2010
In advance of the recently passed legislation against credit card predatory practices all the major credit card companies have lowered customer's credit limits and often have raised their required payments. Since this affects this credit to debit ratio, have the FICO score calculations been modified to reflect this?
Avatar
Bills.com
August 24, 2009
It is impossible for me to offer an opinion whether your father will get a reverse mortgage based on the facts provided. It is always a good idea to complete mortgage documents completely and honestly. To learn more about reverse mortgages, see the FTC document "Reverse Mortgages: Get the Facts Before Cashing in on Your Home’s Equity" and the HUD's Web site for reverse mortgages "Home Equity Conversion Mortgages for Seniors"
Nora C.
August 22, 2009
my dad wants to get a reverst mtge.....has plenty of equity.....he wants to pay off an irs debt.......has already talked to reverse mtge company but hasn't disclosed owing the irs......do u think he'll qualify for reverst mtge.....
Waiting for comments to load Loading more comments
Thanks for your feedback!

Get Tax Relief Help Today!

 

Tool Box   Easy to use resources to help you find solutions to your money questions