One of our readers went car shopping, and had an unpleasant surprise when the dealer made a credit inquiry. Here’s the story:
Recently my boyfriend and I went to look at vehicles for him. He saw one he was interested in but knew we weren’t ready to purchase yet. The auto dealership convinced him to let them run the numbers and that they could get him into that vehicle with less than he is paying now on his current one. They pulled his credit but his score dropped 80 points and is now considered “bad” instead of fair. Why does one inquiry cause your credit score to drop like the floor has fallen out?! He was in the process of trying to re-establish credit after his divorce and now we won’t be able to purchase a home in the time frame we had planned and must wait to get his credit score up to the bare minimum. We’re in the process of disputing the inquiry because he wasn’t ready to purchase yet and he didn’t qualify for the loan. Is there anything else we can do?
Unfortunately, if your boyfriend agreed to allow the dealership to pull his credit and run the numbers, disputing the credit inquiry won’t remove it from his credit report. Having said this, an auto loan inquiry shouldn’t have caused your boyfriend’s credit score to drop by 80 points. This sounds excessive and leads us to believe there was more to the drop than just the auto loan inquiry.
For one, inquiries for auto loans are ignored for the first 30 days. After 30 days pass, auto inquiries are grouped together in 45-day increments. This means you could have 100 different auto inquiries in a 45-day period, and your credit score would only count them as one inquiry. This custom logic only applies to auto, mortgage and student loan inquiries, and was specifically designed to allow consumers to rate shop for the best deal without being penalized for excessive inquiries. Keep in mind, too, that this does not apply to inquiries for credit cards or other types of loans (aside from the ones mentioned above).
Secondly, inquiries play a relatively small part in your credit scores, accounting for just 10% of your score. The more inquiries you have in a 12-month period, the more points you stand to lose, but in general, a single credit inquiry wouldn’t cause you to lose 80 points in one fell swoop. In fact, according to Barry Paperno, a former FICO score insider, “a typical inquiry can be expected to drop your score by about 5 points or less.”
What’s Really Behind the Drop?
While inquiries remain on your credit report for two years, they only count in your credit scores for the first 12 months. After which they’re completely ignored by the credit scoring models. Which leads us to the real issue — what’s really behind his low scores?
It’s likely that something other than the auto inquiry caused his score to drop. Credit scores are based on the information reported in your credit reports, so it’s likely that something other than the auto inquiry was updated in his credit report and contributed to the drop. To truly determine what caused his score to drop, you’d need to compare his credit reports prior to the inquiry and after. Keep in mind, too, you’d need to make sure you’re comparing like credit scores to like. Not all credit scores are the same and if you’re comparing two completely different credit score models, you won’t get an accurate picture of what caused the drop.
In the end, if your boyfriend is trying to build his credit, he needs to first determine what’s currently pulling his score down. This will vary from person to person and is unique to the individual’s credit history. To help get him started in the right direction, there are a few basic steps he’ll need to take:
1. Check your credit reports.
All three of them — to make sure the information is accurate and up-to-date. If there are any inaccuracies, file a dispute to have the errors corrected. Under federal law you’re entitled to one free credit report from each of the three credit reporting agencies once every 12 months.
2. Check your credit scores.
Make sure you do this after you’ve verified that the information in your credit reports is accurate. Remember, your credit scores are only as accurate as the information being reported in your credit report. (You can monitor your credit scores using a tool like Credit.com’s Credit Report Card, which gives you access to your credit scores and monthly updates to track your progress for free.)
3. Pay attention to your score factors.
Each credit score is returned with score factors or reason codes that tell you where you lost the most points in your credit score calculation. This information will help you pinpoint what’s pulling your scores down so that you know where to focus your rebuilding efforts for the best results.
One last word of advice: If you’re planning on purchasing a home together in the near future, it’s important to understand that mortgage lenders will be looking at both of your credit reports and scores. And unlike other types of loans where lenders may only rely on one of your three credit reports and scores, mortgage lenders will pull all three of your credit reports and three credit scores — for both applicants. That means six credit reports and six scores, and they’ll use your middle scores to determine your interest rate and terms. This means you’ll both want to take these steps in order to focus on your credit-building plan together so that you get the best deal possible on the mortgage for your new home.
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