Your credit score provides lenders with a risk-based assessment tool on which to judge your applications for goods or services. Lenders, however, aren't the only ones that need access to your credit history. Insurance companies, utility providers and some employers also run credit checks on consumers. The lower your credit score, the more difficulty you will have finding financing for large purchases and obtaining new lines of credit. Derogatory entries on your credit report, such as unpaid tax debts, negatively impact your scores.
Tax Liens
Unlike other creditors that report to the credit bureaus, government agencies do not hold a reporting contract allowing them to report tax debts directly to the bureaus. Instead, a government agency, such as the Internal Revenue Service, can file a lien against you for any tax debt you owe. If your tax debt is federal, the lien attaches to all your financial assets and real estate automatically. State laws vary regarding when and how state governments file tax liens.
Once a government agency files a tax lien against you, the court records the lien. The credit bureaus regularly scan online court records for new information. Thus, after the court officially records the lien, it will appear in the credit bureaus' searches and subsequently show up within your credit file as a derogatory public record.
Time Frame
The Fair Credit Reporting Act notes that most negative information entered on your credit report can remain there for no longer than seven years and 180 days. Unpaid tax debts are one of the few exceptions to this rule. A delinquent tax lien can linger on your credit record for up to 15 years. If you pay off the tax lien, however, the credit bureaus will delete the negative entry after seven years.
Credit Damage
Although tax liens are always derogatory, there is no way to estimate how much damage a tax lien will do to your credit scores before it appears on your credit report. The credit bureaus calculate individual credit scores using a closely guarded formula that takes all your credit report's financial data into consideration. Because of this, a tax lien could devastate one consumer's scores while causing only minor damage to another's. As a general rule, the higher your credit scores are, the more derogatory entries hurt your scores.
Preventing a Lien
Neglecting to pay off a tax debt doesn't guarantee that your credit will suffer. The government will notify you of an impending lien before filing it -- giving you the opportunity to pay off the debt in full or make payment arrangements with the state tax board or the IRS. After you pay off your tax debt, the government has no reason to file a lien against you, and your credit score will remain unaffected.
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