Credit
And Insurance Rate?
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- You probably know that
lenders use information in your credit report to determine if they'll
give you credit. But did you know that in some states, insurance
companies also consider your credit history? Good or bad, your credit
history may affect your ability to purchase homeowners or auto insurance
coverage and help determine what premium you'll pay.
For example, consider these scenarios:
• Two years ago, you were unemployed for six months. Before you could
find a new job, you fell behind on several credit card payments. Now
your auto insurance rates are going up, even though you've never filed a
claim against your policy.
• You've always paid your bills on time, and you've always paid cash
instead of applying for credit. Why could this be a problem? Similar to
when you apply for a mortgage or credit card, your lack of credit
history means you’re an unknown quantity – there is no history of
monthly credit card payments.
Many people believe that only their driving record is important, but
that’s simply not the case. The majority of auto insurance companies
consider credit to be a very important rating variable.
What's the score here?
Insurers have always used various criteria to determine who to insure
and at what rates. For example, if you're applying for auto insurance,
your insurer might consider your age, driving record, make and model of
your car, and how many insurance claims you've filed in the past. But
within the last decade, insurance companies have also begun using credit
information as an additional factor to help predict which persons pose
more risk. Insurers believe that the healthier your credit history, the
less likely you are to file a claim against your auto or homeowners
insurance policy. And the more likely you are to pay your insurance
premium payments.
If your credit history (along with other factors considered) suggests
that you are likely to be a responsible driver, you may be offered a
lower premium. But if your credit history is tarnished--or if you have
little or no credit history--you may pay higher premiums for the
coverage you're offered. You may even be denied coverage altogether.
How you can improve the score
If you're denied insurance coverage because of your credit history, the
federal Fair Credit Reporting Act allows you to order a free copy of
your credit report from the bureau used by the auto insurance company
who denied you. If you feel the information provided to the credit
bureau is incorrect, you can dispute it.
If you've been turned down for insurance, this may feel like too little,
too late. But if your credit history is affecting your ability to get
auto or homeowners insurance (or the premiums you're charged for it),
here are a few things you can do:
• Clean up your credit immediately. Pay your bills on time every month,
get rid of the high interest credit cards, and don’t spend beyond your
means.
• If you don't have any credit, get some. Your lack of history is what's
hurting you; to the insurance companies, you're an unknown quantity.
Although you don't want to run up excessive debt, you do want to show
that you can use credit responsibly. Use your credit regularly, and
always make your monthly payments in a timely fashion.
• Once a year, get copies of your credit report from all three major
credit bureaus. (The information contained in one report may not be
reflected by the others.) Make sure the information on them all is
correct. Dispute any errors with both the creditors and the credit
bureaus involved.
• Shop around for insurance. Depending on the insurer, prices for the
same coverage can vary substantially.
• Consider higher deductibles to save money. For both homeowners and
auto insurance, higher deductibles can lower your premium costs. Just
make sure you can cover the deductible should you be faced with a claim.
For now, the use of credit reports is an industry standard. Make your
credit work for you by watching it closely. In most cases, you may be
rewarded with lower premiums if you do so.
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