With the recent credit crisis, Americans have discovered the harsh reality of the consequences of bad credit. Along with increased insurance rates, decreased loan availability, and creditors on the phone; a bad credit score can also increase your insurance rates, or affect your ability to even get insured. Some insurance companies are now basing the cost of your insurance policy at least partially on your credit score. Missing as little as two payments on credit cards or other financial obligations could lead to your insurance premium perhaps increasing, doubling or even the possible loss of your policy.
What does my credit rating have to do with my insurance policy?
According to his recent statement to CBS, Donald Hanson of the National Association of Independent Insurers said, "Research indicates that people who manage their personal finances responsibly tend to manage other important aspects of their life with that same level of responsibility and that would include being responsible behind the wheel of their car or being responsible in maintaining their home."
While you may not agree with this judgment call, insurance companies will see your irresponsibility with money as an indicator that you might not be responsible on the road or in your home. This makes you a bigger risk to insure, which will lead to more expensive premiums or a flat out refusal of coverage. According to a recent survey by Conning & Co., a Hartford, Connecticut-based insurance research firm, 92 percent of all insurance companies now use credit information when underwriting new policies.
Is including your credit score when determining rates fair?
Members of the working class, living paycheck to paycheck in Middle America feel that this method of using a credit score for an insurance quote is unfair to a population that is already straining to make ends meet. Others argue that credit scores are a good way to determine premiums because they are based only on objective financial data and not age, gender, location, demographics, where you work, what your job is, how much you make, etc. They consider the use of credit scores is the only fair and non-discriminatory method of determining rates.
The insurance industry has pleased both sides by using credit ratings only in addition to other factors including driving record, age, health, and vehicle details when determining your policy and premium rates. Other demographic information such as race, color, religion, national origin, gender, marital status, sexual orientation, are never used for insurance scoring purposes.
The effects of using credit scores on the insurance industry
Using credit scores for insurance rates has allowed auto insurance companies to offer more products to more people. Since credit scores have been used, competition in the insurance market has increased, leading to more choices for consumers. This also allows financially responsible consumers to be rewarded with the best rates. Without the use of insurance scores, good drivers and responsible homeowners would pay more for car insurance, subsidizing those who are more likely to have a loss.
To determine whether or not your insurance company is using credit scores to determine rates depends largely on where you live. In some states, insurance companies are not allowed to pull your credit score. On the other hand, most states do allow this. Check with your local insurance agent for questions regarding this policy and other ways to decrease your insurance rate.
Your Credit Score and Your Home Insurance Rates
Like it or not, your credit score affects nearly every aspect of your life. Your credit report affects your ability to find a great apartment, get a car loan, and sometimes get a good job. Your credit score affects how much your credit card limits are and what your interest rates may be.
Understanding how important your credit score is, there should be no surprise that it affects your insurance rates as well. Many home insurance companies use credit scores to calculate rates, and a homeowner could be paying up to 50 percent more for home insurance due to a poor credit score.
Insurance rates are determined by your “insurance score.” The insurance score is a combination of several factors, including motor vehicle records, application information, your past insurance experience, and loss reports to assess your overall insurance risk and your credit score. The insurance score is used to measure how well you manage their overall finances. The credit score is a one of the major factors that contributes to your overall insurance score.
To do this, they use a simple formula: The higher a homeowner’s credit score, the lower their risk level. Statistics show that homeowners with good credit file fewer claims than homeowners with poor credit. For this reason, those with higher credit scores are rewarded with cheaper home insurance rates.
Maintaining good credit is essential to keeping a healthy financial portfolio. You do not have to be wealthy to have a great credit score. One of the best ways to maintain a good score is to keep your credit card balances low and pay them off immediately. Keeping several credit cards at or near the credit limit is a sure way to lower your score.
Your credit score is a direct reflection of your level of financial responsibility. Pay bills on time. Not only do late payments result in extra fees, they are indicative of irresponsible financial management and will lower your credit score.
Do not stretch yourself too thin. Keep a minimal number of accounts open at any one time. Consider all financial accounts including bank loans, credit cards, department store charge cards, gas cards, car payments, etc. Keep everything within comfortable limits. Over extending yourself and having too many financial obligations will hurt your overall credit score, even if you carry cards that you don’t use.
Check your credit for inaccuracies. Credit reports are not always immune to mistakes, and it is important for you to check your credit score each year to be sure that the information is accurate and up to date. Consumers are entitled to one free credit report each year.
Take advantage of this offer and review your credit score on a regular basis. If your credit score has increased over the last year, contact your local insurance agent and see when they will be re-evaluating your policy to check for a possible decrease in your premium.