We have all seen the TV and radio commercials asking if you know what your credit score is. While most people associate their credit score with the cost of borrowing money, did you know that your credit score impacts how much you pay for home and auto insurance?
According to Money Magazine, in most states now insurance companies are allowed to use your credit information to formulate premiums and the U.S. Supreme Court has said that the insurance company doesn’t need to tell you if your credit has caused you to pay more!
The impact of the decision: “You are not going to know if your credit score is costing you,” says Harvey Rosenfield, founder of the Foundation for Taxpayer and Consumer Rights.
As a result some 90% of home and auto carriers use a score based on credit data as part of that recipe, according to risk-assessment firm Fair Isaac, known for its FICO credit score.
Why do insurance companies care what your credit score is? “Studies show that how people manage credit is a good predictor of insurance risk,” says Claire Wilkinson of the Insurance Information Institute; in other words, insurers think that if you don’t pay your bills, you’re likely to file a lot of claims.
One way to minimize rate hikes by the insurance companies is to make sure that your credit report is accurate. Money offers five tips to improving your credit score:
- Pay bills on time: Late payments show up for seven years.
- Keep revolving balances low: Insurance companies look at how much debt you have relative to available credit.
- Keep your oldest credit card: Insurers like folks with well-established lines of credit. Five years is good, 10 ideal.
- Don’t apply for lots of credit at once: Your score might drop. (You’re not penalized for shopping, however; multiple auto or mortgage inquiries within 45 days are considered as one.)
- Get rid of miscellaneous cards you don’t use: Having too many can hurt your score.
Since the insurance carriers are pulling information directly from your credit report it is a good idea to check it on a regular basis. That recent increase in your auto or home insurance might be due to some bad information on your credit report, and not due to a regular price increase from your insurance company.
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It should be illegal for this to happen. Victims of identity theft suffer for decades with recurring bad credit reports through no fault of their own. Others should not be able to change rates based on anything but your business with them.
Please write to your legislators and help victims of identity theft. Thank you.