Tax liens have an indirect effect on credit scores and make it difficult to secure loans or get funding from outside sources.
Having a tax lien on your home or business used to be a death sentence for credit scores. The lien would be reported to the three major credit reporting bureaus, Equifax, Experian, and TransUnion, and could remain on there for up to seven years, even if you paid it. If you didn’t pay the tax debt, the lien could end up on your credit report for as long as 10 years.
Check out this video: How to Get IRS to Withdraw or Remove a Federal Tax Lien
Does a Tax Lien Impact Your Credit Score?
If you have recently had a tax lien placed on your home, the good news is that it will no longer directly impact your credit score or show up on your credit report.
This wasn’t always the case. Until a few years ago, a tax lien would be reported to the credit bureaus and lead to a drop in your credit score.
Because a tax lien was seen as a very derogatory mark on your credit, it could impact your credit score by as much as 100 points. This would make it extremely difficult to get back on your feet after paying off your tax debt because you would have difficulty getting a loan or line of credit.
Recently, though, changes have been made that mean not all liens end up on your credit report. In 2018, the three credit bureaus removed all tax liens from credit reports. A driving force for the decision to remove tax liens is the fact that names and addresses can get mixed up on credit reports. You could end up with a tax lien on your credit report that isn’t yours if someone with your exact name and similar address has a tax lien.
Why You Should Still Resolve or Pay Your Tax Lien
Just because a tax lien does not directly affect your credit score doesn’t mean you should take it lightly or not pay it. When you have a tax lien, you will still have difficulty getting loans because lenders do not want to give money to someone who has an existing lien on their home or business.
Until you resolve or pay your tax lien, you may end up in more debt, which can negatively affect your credit score. Your credit report is made up of several components that all add up to tell a story of your creditworthiness. According to FICO, these include:
- Credit Mix
- New Credit
- Payment history
- Amount of debt owed
- Length of credit history
Until you can resolve your tax lien, you will likely struggle to keep your credit score where you’d ideally like it to be. So, while a tax lien doesn’t directly lower your credit score, it will likely still have indirect consequences.
If you’re facing a tax lien and need help figuring out the best way to resolve it, get in touch with us. Our tax law team can review your situation and help you determine the best approach to resolving your tax lien.