When I applied for a car loan last December, my FICO score came back at 781. About 6 weeks ago, we looked at refinancing our home, and the FICO score pulled from the lender came back at 763. That shocked me quite a bit, as I wouldn't think my score would drop almost 20 points simply for taking out a new car loan. But, I shrugged it off, and have since did even more to improve my score--notibly paying off all CC debt, which was low to begin with, while keeping a small balance on just 1 card. Across my 4 CC's, I have 60k in credit, yet I'm using only $500 of that total credit (again on one particular card with a 15k limit). Well, my credit was pulled yet again by the same mortgage company, as we decided to sell our home and get pre-approved for a new loan, and sure enough my score came back at 755.
Is all of this typical or is there something I should be concerned about? A score drop of 26 points seems like quite a bit. Now, if my score will assuredley jump back up to the 770's+ soon, then I have no worries whatsoever. My main concern is that it will continue to slide downward. One last thing...when my credit was first pulled last December (before buying the car), it didn't say anything about having too much debt (as a negative factor) on my report. However, when it was pulled this week, suddenly it says one of the negative factors is I have too much debt in relation to my overall credit. I thought this was odd given I had roughly 3k in CC debt last December, whereas I have $500 in debt now. My % of credit used is literally .3% of my overall limit. Does my car loan have anything to do with this? I thought installment loans were totally seperate from revolving accounts, but I could be mistaken.
Thanks in advance for any insights...
No, all three (car dealership and our current bank/loan provider) used the exact same FICO scoring model. That was my first inclination before looking at all three reports, and their source/scoring model used was all identical.
When you have a high score, say over 750, negative items no matter how minor they might seem have a much larger affect on your score. These affects usually don't last very long, say 6 months before your score will return to normal.
You have a new inquiry and higher debt from the car loan. That is probably what took your score down temporarily. You need to take these hits every now and then to be able to establish history for your scores to be high in the first place.
You really shouldn't get any new credit at least 6 months before applying for a mortgage and 1 year is even better yet. Most underwriters will request your reasons for getting any new credit that is less than 1 year old at the time of application.
You mentioned that you shouldn't get any new credit within 6 months of applying for a mortgage. I assume this means my new car loan, correct? Also, you mentioned higher debt from a new car loan; again I thought installment loans (such as car loans) didn't affect your score and/or didn't somehow go against you in terms of your overall debt. Obviously I'm mistaken here.
Yes, any new credit. It can actually drop your score when it hits your CR. Those with higher scores tend to see larger drops in scores for even an inquiry.
Installment loans play a very small piece of your score. They have their own utiilization and are not factored into revolving utilization. All outstanding debt is factored into your DTI.
You don't really want ANY NEW CREDIT one year before applying for a mortgage. This means credit cards, auto loans, pay day loans or what have you. Any kind of new credit will knock your score down for about a year. (Let me qualify this. New credit will make your score go up if you are just starting out or rebuilding.) If you have a high score, a few missteps in the year leading up to applying for a mortgage could end up costing you thousands of dollars if you miss getting a lower interest rate by a few points.
Unless you really need a new car, getting a car loan in the year leading up to a mortgage is a big mistake. Now I know you are just refinancing an existing mortgage so it is not quite as bad, but I am talking about an original mortgage. These are the reasons a car loan is bad in the last year:
1. You now have an installment loan on your reports for tens of thousands of dollars and it is new credit. Can you make the car payments? That's what the lender will be asking. They don't know because it is new credit and you have not demonstrated being able to make the payments for a year.
2. The inquiry to get this loan cost you anywhere from 5 to 20 points off your scores. Hope you weren't close to an interest rate step.
3. Dollar for dollar you just qualified yourself for a much smaller house. Whatever your car payment is will be directly taken off the size of the monthly mortgage payment the lender will figure that you can afford. Yes, it will have a direct impact on your DTI ratio.
Now, a good income can overcome all of it except for the interest rate the lender will be charging you for the loan. That interest rate is 100% credit score based.
When you have a high score, say over 750, negative items no matter how minor they might seem have a much larger affect on your score. These affects usually don't last very long, say 6 months before your score will return to normal. I disagree, You can have a Fico score of 750 and have a BK and it will affect your outcome.
You have a new inquiry and higher debt from the car loan. That is probably what took your score down temporarily. You need to take these hits every now and then to be able to establish history for your scores to be high in the first place. Installment loans have very little affrect on Fico scoring!!!!
You really shouldn't get any new credit at least 6 months before applying for a mortgage and 1 year is even better yet. Most underwriters will request your reasons for getting any new credit that is less than 1 year old at the time of application. Depend on the lender, not all lenders will dock you for opening a new CC within 6 months.