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How much of a negative impact can hard credit inquiries have on your credit score? A reader wrote in, asking a common question, but the impact on his score was rather extreme. We take a look at what could have caused such a huge drop.

"I have refinanced 3 times in the last 2 years, creating 3 hard credit inquiries at each of the 3 bureaus over 2 years," the reader wrote. "Each time, though, my credit was excellent at 800, and I received the mortgages and my interest rate dropped from 6.375 to 3.375. The way I did it there was no cash out from me to refinance, so it was a positive win for me.

"HOWEVER, when I called my current lender to check on what their current rates were -- told them my credit score, as it had just been pulled by my mortgage broker, as I was going to refi with another bank and I had a copy of it -- my bank did a hard inquiry without my permission, and that dropped my credit score 104 points as soon as it hit -- it was the only thing that changed on my credit report. It must have been the proverbial tipping point.

"Bottom line, when I went to dispute the unauthorized hard inquiry, the credit score companies said I cannot dispute hard inquiries unless it is identity theft. This doesn't seem right. And they said it will stay on my record for two years."

Following is my response to the reader:

I'm sorry to hear about the loss of 104 points off your credit score and can easily understand why you might feel that "this doesn't seem right." Regretfully, there seems to be an abundance of inaccurate information about credit scores being provided by both lenders and consumers -- and particularly how inquiries affect credit scores. So I'll offer some suggestions and correct any misconceptions stated in your question, as we both try to understand what has happened to your credit score and decide where you should go from here.

The main misconception to dispel is that additional inquiries alone can be responsible for the loss of more than 100 points. The truth is that a typical inquiry can be expected to drop your score by about five points or less. And while this number can be higher or lower on occasion, a credit score will not drop 104 points solely due to an increase in inquiries.

So what caused such a serious drop in your score? Here's where it can get confusing. While I believe, as you stated, that you truly didn't see anything else that changed on your credit report, it's a fact that something other than -- or in addition to -- inquiries would have had to change on your credit report for your score to take that serious of a drop.

Here are some questions that will hopefully help you get closer to solving the mystery of your credit score drop:

  • Are you comparing apples with apples? That is, when looking for credit-reporting changes, were you able to compare the actual credit report generating the 800 score with the one that produced the 696 score? This is important, because there are three independent credit-reporting agencies, or CRAs -- Equifax, TransUnion and Experian -- that generally don't share information with each other; there are many different credit-scoring models with different score ranges; and each credit report and score reflects your credit information at a single CRA as of a specific point in time. So if you're not comparing credit reports from the same CRA as of the dates for the two credit scores (800 and 696), you may not be getting to the source of what, if anything, has changed on your credit reports, and the impact of those changes.
  • While you're correct in stating that inquiries remain on a credit report for two years, are you also aware that they're included in your credit score for the first year only? This means all of your inquiries over the past two years are probably not being counted in your score.
  • Did you know that inquiries for a mortgage or refinancing are treated differently than some other types of hard inquiries (credit cards, for example)? Multiple mortgage inquiries, as well as inquiries for auto and student loan applications, that are generated over a focused period of time, such as 45 days, are counted as a single inquiry only.

Armed with this information, my recommended next step is to obtain your free Credit Report Card from Credit.com, then review your Experian credit data, Experian credit score and "estimated" Experian FICO score. Unfortunately, you will not be able to get your "actual" Experian FICO score, as Experian does not make its FICO scores available to consumers. (Do you know your credit score? Take this MSN Money quiz to get a free estimate.)

Then order your Equifax and TransUnion FICO scores, along with the credit reports on which the scores are calculated, at myFICO.com. Since you're trying to obtain a loan and FICO scores continue to be the scores used by most lenders, it's best to obtain your actual FICO scores in this situation, when possible. This way, you'll see the scores most likely to resemble those a lender would see.

Once you've carefully reviewed your credit information from all three CRAs, and your Equifax and TransUnion FICO scores, you should have a better idea of what changes may have affected your credit scores, and what steps you can begin take to improve them.

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