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Insurance Rates & Your Credit
Score
by Gary Foreman
Question: Be aware that most insurance companies base their premiums in
part on your credit score. I have heard from many people that their
insurance premiums have jumped dramatically in the last year. They
called their carriers and found that the rates went up because their
credit score dropped down from a good score to a mediocre or low score.
Even when they went to higher deductibles, it did not make a dent in the
premium. ~ Denise
Denise has discovered that beginning around 2002 insurance companies
began to consider credit scores. Today over 90% of the largest auto
insurers use them. Not only to decide whether to insure you, but also to
determine what rates to charge.
The goal of the insurance company is to set a rate low enough to attract
business, yet high enough to cover claims and earn a profit for the
company. Since they can't see into the future they've always looked for
ways to group people that would help them determine who's more likely to
file a claim. Insurers say that studies show a correlation with a
person's credit score.
Technically, most insurance companies use an 'insurance score' to help
provide quotes. The insurance score is similar but slightly different
than your 'credit score'. It's calculated by ChoicePoint and includes
credit scoring information. You can get a copy of your score at
choicetrust.com (1-866-312-8076) for $12.95. Insurance scores do not
include income or racial data.
'Credit score' generally refers to the FICO (Fair, Isaacson Co.) score
that includes roughly 20 items. They do not release the formula so no
one knows for sure what's in it. A good score is generally 760 or
better. A bad score is 600 or below.
We're not going to debate whether it's good or bad for insurance
companies to use credit and insurance scores. We'll leave that to
others. What we will do is to help Denise get the lowest possible
insurance rates.
Denise should begin by checking her credit score. According to The Fair
Credit Reporting Act you're entitled to a free copy of your credit
report yearly from each of the three major credit reporting agencies.
The agencies are: Equifax (equifax.com or 800-685-1111); Experian (experian.com
or 888-397-3742) and Trans Union (transunion.com or 800-888-4213). You
can request a free report at AnnualCreditReport.com or 877-322-8228.
Denise needs to make sure that her score does not include inaccurate
information. According to the Public Interest Research Group about 1 in
4 reports have serious errors that negatively affect the credit score.
If Denise finds errors she can request that they be corrected. Just call
or visit the agency site and ask for 'dispute resolution'.
If all the bad information is correct, there are still things that
Denise can do. Try to resolve any problems that are causing your credit
score to drop. Large bills like medical, mortgage and car payments can
often be set up on a payment plan if you contact the lender. Talk with
them before an account becomes past due.
Most insurers put more weight on your credit activity within the
previous year. So make an effort to avoid any late payments. Also, keep
any one card from being 'maxed out'. It's better to have your balances
spread among a few accounts.
Beware of people who offer to 'fix' your credit history or to create a
new credit identity. They can't do anything legally that you can't do
for yourself.
Once Denise has done what she can with her credit score, it's time to
talk to insurers. Not all will treat your credit score the same way.
Some are more tolerant of a low score than others. So it pays to shop
around.
When it's time to renew your policy ask your insurer to re-evaluate your
credit score, especially if you've been working to improve it.
If, on the other hand, Denise has a good credit score she'll want to use
it to her advantage. Make sure to insure with a company that includes
credit scores. Again, shop around. Some insurers could be more
aggressive in lowering rates for high scorers.
Finally, Denise can expect to see other uses for her credit score.
Landlords and potential employers are already looking at them. All this
underlines the importance of managing your credit score. Not only doing
what it takes to earn a high score, but also monitoring to make sure
that no errors knock down your score.
About the author
Gary Foreman is a former financial planner who currently edits The
Dollar Stretcher.com website and newsletters. If you'd like more time or
money, visit
TheDollarStretcher.com. You'll find hundreds of articles to help
stretch your day and your dollar!
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