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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: |
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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.
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| 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 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: |
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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.
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| 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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| Please note that this
description/explanation is intended only as a guideline. |
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