Why does INQ's drop your score

[dpage]

One thing that I cannot figure out to save my life is, why do inquires drop your fico score. You have to get your credit pulled to get credit.  I believe you should not be penalized for that. Am I just crazy?

[haulingthescoreup]

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@dpage wrote:

One thing that I cannot figure out to save my life is, why do inquires drop your fico score. You have to get your credit pulled to get credit.  I believe you should not be penalized for that. Am I just crazy?

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There usually isn't a penalty for the first inq on a report. Then maybe there's a couple of points for the second, then none for the third, then a couple more for the fourth, and so on. (This varies by credit profile.) It runs out of gas after the 5th or 6th, I think. And it only scores inqs for 12 months, even though they display on full reports for 2 years.

When they crunch data from credit reports, the score developers found that those with lots of inqs in a year are more likely to run into trouble paying their bills on down the road. The more inqs, the more likely that trouble will hit. Sure, there are people who have a lot of hits in one year and are fine, and others with no inqs who tank, but the score formula is a risk analysis algorithm (wooo! ), and it essentially describes what has been found in the the past to be associated with higher risk.

One thing I've noticed is that those with very little credit, aka "thin files", or short history seem to get penalized less for inqs than those with 20-year histories, which makes sense if you think about it.

Lenders are different from the score formula. Some go nuts if they see a few inqs, and others don't even blink.

[marty56]

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@haulingthescoreup wrote:

 When they crunch data from credit reports, the score developers found that those with lots of inqs in a year are more likely to run into trouble paying their bills on down the road. The more inqs, the more likely that trouble will hit. Sure, there are people who have a lot of hits in one year and are fine, and others with no inqs who tank, but the score formula is a risk analysis algorithm (wooo! ), and it essentially describes what has been found in the the past to be associated with higher risk.

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The problem I have with this is that these days more companies are doing INQs for non-credit types of things like cable TV, new bank accounts, cell phones, apartment .  I think FICO sould allow for those type of INQs with hurting your FICO score.

[Anonymous]

I agree. I checked my credit report just last week and I had an inquiry from ATT.  I don't think they should count against me, but then again I think the FICO rules are too harsh to begin with IMO.

[vanillabean]

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@marty56 wrote:

The problem I have with this is that these days more companies are doing INQs for non-credit types of things like cable TV, new bank accounts, cell phones, apartment .  I think FICO sould allow for those type of INQs with hurting your FICO score.

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There are certainly times when a hard inquiry is pulled when it should have been a soft. I've read somewhere that sometimes someone is simply not aware of the checkbox that would make it a soft. I suppose FICO cannot regulate that, although, as hauling reminds us, the cap of five or six is a nice touch.

When the new loan from our recent refinance was picked up by a servicing bank, we were pleasantly surprised it was a soft inquiry; it was a hard one a year ago. I was so irritated for so long about it, because the borrower is not requesting that the loan be transferred.

So when it recently fell outside its one year window, I was pretty happy, and because it didn't happen all over again. I was just looking at one of DW's myFICO TU score reports from a few months ago. That inquiry was the only one, about ten months old at the time. The report was pulled listing reason codes; here is one of the two codes:

"You've recently been looking for credit.
Each time you apply for credit a credit inquiry is added to your credit report. Your credit report shows recent credit inquiries, which indicates that you've recently been seeking credit. People who are actively seeking credit pose more of a risk to lenders than those who are not. Your FICO score was lowered due to the number of credit inquiries performed within the last 12 months. Your FICO score will consider these recent inquiries less as time passes, provided no new inquiries are added."

So a single inquiry can apparently hurt you. Not that DW lost any sleep over it; her score was 818, leaving comfortable cushion.

[haulingthescoreup]

That's not surprising in her case, I suppose. First of all, they don't have much of anything else to scold her about, and secondly, people with her scores and her presumably long history don't usually go looking for new credit. (This is what I meant by it varying by credit profile.)

Was this the first or second negative? Although actually, I'm surprised that any negatives displayed at all. myFICO doesn't usually show negatives for the 800 crowd.

[vanillabean]

Those two codes may well be pure bogus. I lean towards her scorecard not being optimal at the time. If the report had said, go get a car loan or bring your AAoA past the seven year point (the former won't happen, the latter later happened), it would have made more sense. Oh and the reason the codes were listed was because we pulled that special edition that lists reason codes.