The Difference Between Good and Bad Liens on Your Credit

Liens: at one point or another, most of us have had them. Whether it’s taking out a mortgage, opening a line of credit, or something more complicated, it’s incredibly important to understand how good and bad liens can affect your credit score. Let’s take a look at some examples of good and bad liens.

Good Liens

Consensual liens are generally considered “good” liens — these will typically have no effect, or a positive effect, on your credit score. Common consensual liens include: residential mortgages, vehicles, and business assets. Taking out a loan or opening a line of credit can also be good liens that help to establish a strong credit score. As long as you are consistently paying off your mortgage or making payments on the financing according to your agreement, consensual loans will not impact your credit.

Consensual liens become damaging to your credit only when the creditor takes the assets back (due to nonpayment). If you think you will be unable to make your regular payments due to unforeseen circumstances, you should consult with your creditor to see if you can come up with a mutual-agreed-upon alternative payment plan.

Bad Liens

Statutory and judgment liens are the types of liens that you want to avoid because they can negatively impact your credit score over a number of years.

Statutory liens include mechanic or contractor’s liens, as well as tax liens. Mechanic and contractor’s liens occur when a contractor or mechanic is not compensated for work performed (and that work makes up a large part of the value of the home, car, or building upon which it was performed). A tax liens can be placed by the government if income, property, or estate taxes are not paid. These statutory liens can have a lasting effect on your credit score and will remain listed for seven years!

Arguably the worst kind of liens to have, judgment liens happen when a court grants financial interest in your property or your assets to a creditor. These, too, can remain listed on your credit score for up to seven years.

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