Credit scoring, the term used by insurance companies to rate your credit, has been a disaster for some consumers. Most insurance companies are now basing the cost of your insurance policy on your credit score. Missing as little as two payments on credit cards or other financial obligations could lead to your insurance premium possibly doubling. If your credit score is bad you could pay more when getting an insurance quote. And, regardless of the time you have been with your insurance company or your loss history, a low credit score could lead to a higher insurance premium or possible loss of your policy.
Many are asking, "What does one's credit rating or credit score have to do with their insurance policy premium or insurance quote?" The answer may surprise you. Insurance companies feel that if you are not responsible with your money, then you are more than likely not going to be responsible on the road. According to his recent statement to CBS, Donald Hanson of the National Association of Independent Insurers agrees. Hanson stated, "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." Some disagree with Hanson's ideas on insurance credit scoring and feel it creates a hardship for many who are already struggling.
What can I do to improve my score?
Credit scoring systems are complex and vary among creditors or insurance companies and for different types of credit or insurance. If one factor changes, your score may change — but improvement generally depends on how that factor relates to others the system considers. Only the business using the scoring knows what might improve your score under the particular model they use to evaluate your application.
Nevertheless, scoring models usually consider the following types of information in your credit report to help compute your credit score:
- Have you paid your bills on time? You can count on payment history to be a significant factor. If your credit report indicates that you have paid bills late, had an account referred to collections, or declared bankruptcy, it is likely to affect your score negatively.
- Are you maxed out? Many scoring systems evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, it’s likely to have a negative effect on your score.
- How long have you had credit? Generally, scoring systems consider the length of your credit track record. An insufficient credit history may affect your score negatively, but factors like timely payments and low balances can offset that.
- Have you applied for new credit lately? Many scoring systems consider whether you have applied for credit recently by looking at “inquiries” on your credit report. If you have applied for too many new accounts recently, it could have a negative effect on your score. Every inquiry isn’t counted: for example, inquiries by creditors who are monitoring your account or looking at credit reports to make “prescreened” credit offers are not considered liabilities.
- How many credit accounts do you have and what kinds of accounts are they? Although it is generally considered a plus to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many scoring systems consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies may have a negative effect on your credit score.
Improving your score significantly is likely to take some time, but it can be done. To improve your credit score under most systems, focus on paying your bills in a timely way, paying down any outstanding balances, and staying away from new debt.
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