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Ask Dr. Don

FICO foul-up

Dear Dr. Don,
I have one late payment that caused my FICO score to drop. How long after this late payment does it take for the FICO score to go back up?

Also, the score supposedly dropped because I had inquired about refinancing with three different lenders. Why is that? It seems I should be able to shop for the best deal. Is there any way I can do this without dropping my score?
Suzanne Scoring

Dear Suzanne,
A credit score is issued by credit bureaus and is a consumer credit rating generated by proprietary credit models. Equifax has its Beacon score, Experian has its FICO score and TransUnion has its Emperica score. The credit bureaus all use Fair, Isaac and Company to create their credit-scoring models. All three models use information in your credit report to determine your credit score. For convenience, I'll refer to all the different credit scores as FICO scores.

Your credit score is dynamic and changes regularly as the information in your credit report changes. Staying current on your payments will improve your score over time.

Shopping lenders for a mortgage or auto loan won't hurt your credit score as long as you limit that search to a few weeks.

According to the Fannie Mae's Credit Scoring Guide, "The credit report data used to calculate credit scores does not include auto or mortgage loan inquiries that occur in the 30-day period prior to the score being calculated, and auto and mortgage inquiries that occur in any 14-day period are always considered one inquiry."

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FICO in its myfico.com site suggests clustering these loan inquiries but doesn't provide the specifics listed by Fannie Mae.

If you string things along, it's not apparent that you are comparison shopping, and the multiple credit applications will hurt your credit score. A good way to minimize this risk is to shop rates first on Bankrate. When you're ready to refinance, you can then shop the lenders within a short time and limit the impact on your credit score.

Equifax and Experian have credit score simulators that let you run "what if" scenarios that will show you how changes in your credit history change your credit score. Myfico.com has a good discussion of what factors influence your credit score.

As for how long it will take for your credit score to recover from a late payment, the more recent the late payment, the greater negative impact on your credit score. The later the payment the more you're penalized. You'll see a gradual improvement in your FICO score as time passes, but you won't be able to tell when the late payment no longer affects your FICO score.

-- Posted: Jan. 31, 2003
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See Also
Credit management guide
Late with one creditor? All will punish you
Financial advice glossary
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