How Badly Does a Lien Affect Your Credit?

by Lisa Carlson, Demand Media

    Having a lien placed on your property could be a major downer. If you're dealing with this situation, your stress levels are probably already high. But knowing how it will affect your credit is also important, and that isn't good news, either.

    What is a Lien?

    A lien is an assertion of legal interest in your property. Common types include judgment, mechanic and tax liens. Judgment liens can be placed on your home if a person or company, such as a credit card company, wins a lawsuit against you in court.
    A general contractor can file a lien on your house if he didn't get paid for the work he did. Home repair companies or subcontractors can also use this kind of lien.
    A tax lien is used by the Internal Revenue Service and other tax collecting entities if you have an unpaid tax bill.

    How Do Liens Affect You?

    A lien on your house could mean that you can't sell the property until the lien is removed. You could also be restricted from obtaining a home equity loan or a mortgage in the future. In short order, your property can be subjected to legal liability, which basically means that your house could be sold and the proceeds used to pay off your debts.
    This can negatively affect your credit and make it almost impossible for you to sell the property or get approved for a home equity loan.

    How Do Liens Affect Your Credit?

    Liens can severely affect your credit negatively. Because the credit reporting bureaus don't give out their formula for calculating credit scores, there is no way to know exactly how badly your score will drop in the face of a lien. However, take into consideration all the criteria the bureaus compile to get your score:
    Payment history counts for roughly 35 percent of your score. This is the most heavily weighted criteria. Debt-to-income ratio, or total debt and total available credit, counts for about 30 percent. The length of your positive credit history accounts for approximately 15 percent. The mix of credit types you have, such as credit cards, student loans and a mortgage, counts for about 10 percent. The number of new credit applications you have recently completed accounts for about 10 percent of your score.
    A lien would fall under the payment history category, because the lien resulted from an unpaid debt. In terms of negative marks, having a lien on your credit history would fall between making several late payments on a credit card and declaring bankruptcy.

    What Steps Can You Take?

    If you already have a lien on your property, pick up the pieces and move forward to rebuild your credit and remove the lien as fast as possible. Contact the entity that has the lien and be honest when talking about repayment. Don't make false promises if you can't afford to pay it, and follow through if you can.
    After your property is lien-free, order your credit report and scores from all three bureaus to see how bad the damage is. It may take up to 90 days for the bureaus to receive the lien information.
    Once you know the situation on your credit report, take steps to bring your score up. Making your payments on time, every time, is the fastest way to rebuild your credit. Liens can stay on your credit history for up to seven years, but you can counter that negative history with positive repayments.

    About the Author

    Lisa Carlson works as an associate director of recruitment and graduate programs at a public university, and has experience in management, marketing, personal finance and nonprofit organizations. She is a peer-reviewed author on publications for higher education recruiting and holds a B.S. in marketing and a M.B.A.