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Did you know that your credit score could affect how much you pay for car insurance? How about homeowner's insurance? In fact, your credit score may play a part in your being DENIED coverage altogether!

Bad Credit Could Mean Higher Insurance Premiums

A "scorecard" or scoring model is used to determine a consumer's overall credit score. This is a mathematical equation that evaluates many types of data contained in the consumer's credit report. The information is compared to a database of past credit reports and the resulting score indicates the consumer's level of credit risk.

Until recently, our credit scores were primarily used for loan approvals. Credit scores were created in an effort to predict the likelihood of our repaying a loan. Lately, credit scores have been used for other reasons, too, including employment background checks and apartment rentals. These purposes make sense. For example, if a job applicant is trying to get a bookkeeping job, having a history of not paying bills is probably not a very good sign. The same goes for apartment rentals. Rent is a monthly payment and if someone misses a lot of monthly payments, there is a good chance that the rent will be missed somewhere along the way.

Using credit scores to determine insurance premiums and coverage is a fairly new practice in the insurance industry, but it is very common. About 90% of insurance companies in the United States use credit scores as a part of the underwriting process. Keep in mind that insurance companies also use other factors, such as your age, location, and driving record, when evaluating your coverage. They actually calculate an insurance score that includes your credit information. Each insurance company has its own scoring model, but almost all of them use your credit score as a component.

But what is the connection between a low credit score and driving, or major home repairs? According to the insurance industry, a consumer with a low credit score is more likely to file a claim than a consumer with a high credit score. Since credit-challenged consumers are more likely to file a claim, they get charged higher rates, or are denied coverage outright. There may be several reasons why someone with a low credit score would file more claims. The most obvious is that if someone is having money problems, it is not likely that he or she will have a lot of extra money available for car repairs, or to fix a roof, making it necessary to file an insurance claim.

Some states have recognized that using credit scores in insurance underwriting can create some big problems. First of all, many states require that drivers have car insurance and many mortgage lenders require that homeowners have homeowner's insurance. If consumers are denied insurance, they may not be able to drive, or may even have to give up their homes! Another problem is that over 40% of credit reports have significant errors on them, so some consumers may be paying higher insurance rates because of a reporting error. And finally, credit scores change for a lot of reasons. If someone buys a house, for example, his or her credit score may decrease to reflect the new debt load. Some consumers have seen their premiums increase for this very reason.

As a result, some states have passed laws limiting or banning the use of credit scores in insurance underwriting. There are several other states considering legislation as of this writing. For your state's insurance laws, search your state's official website.

What Can I Do?

If your credit score has caused your insurance premiums to go up, or if you have been denied coverage, the first step is to get copies of all three of your credit reports. You can contact the credit bureaus with the following information:
Provides consumers with one free credit report per year.
Phone: (877) 322-8228
Equifax Credit Information Services
PO Box 740241
Atlanta, GA 30374-0241
Phone: (800) 685-1111
PO Box 2002
Allen, TX 75013
Phone: (888) 397-3742
Trans Union
Trans Union
PO Box 2000
Chester, PA 19022
Phone: (800) 888-4213

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