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Insurance companies get your credit score converted into an "insurance score" and judge what you should pay in premiums - the lower your score, the more you pay.
Insurance companies have used credit scores for quite some time to judge risk. In New Jersey, this has been primarily done in the homeowner's insurance area. But to attract one new auto insurer to NJ (Mercury), the NJ Department of Banking Insurance is allowing them to use credit scoring to set premiums. It's logical to assume that other auto insurance providers will soon be permitted to use credit scoring also.
This is an
important issue and we will devote much of this month's "Insurance
Matters" giving you helpful insights on credit scoring and how you can
improve or maintain yours.
Is
credit scoring fair? Accurate?
Insurance companies
say it is and point to a number of studies that show a correlation of
lower scores to higher claims.
Consumer groups say this is not fair because it tends to penalize minority groups and those with low incomes.
Credit scores can vary as much as 50 points depending upon which credit bureau provides the report. Some reports contain errors.
If a lender turns you down, they are required by law to notify you in writing and give you information on the credit bureau that provided the report.
Insurance companies are not required to tell you your "insurance score" or even how they determined that score. Under the Fair Credit Reporting Act they are required to notify for of "any adverse action" - cancellation, premium increase, etc. - but not when quoting initial rates.
If credit scoring is not allowed, is it fair for those with good scores to subsidize those with poorer scores?
These are
all good points and, depending upon a person's perspective, opinions
vary.
Insurance companies need to make a profit. If credit scoring provides an accurate picture of future risk, why shouldn't it be used?
If you are struggling with your bills are you really more likely to file an insurance claim? Suppose you lose your job and fall behind on some of your payments, lowering your credit score, will your insurance rates go up right away? Conversely, if you improve your credit score, when will your rates go down?
How often do insurance companies evaluate your credit score?
These are all valid
questions. The answers vary by person, by company, and by state. Credit
scoring has been and will be around for quite some time. It may or not be
fair. Will it be used accurately, objectively, and uniformly? No one
really has those answers. But, to make the best of the current situation,
read on to learn more about your credit score and the "do's and don'ts"
for improving your score.
What is my FICO score?
It's a number from 300-850 - the higher the number the better.
This number is generated by an almost magical formula that used to be totally secret. It was developed by the Fair Isaac Company (hence the name FICO score).
The formula assigns values to past credit history and current activity. Here are the important percentages that comprise your score:
Debt payment
history......................................................35%
Outstanding
debt and number of accounts .........................30%
Length of credit history...................................................15%
Type and number of accounts..........................................10%
New accounts and recent requests for credit .....................10%
How you fare in each category determines your current credit score. Your FICO score changes. Your score next week may be different than today. It goes up and down depending upon how much you pay, when you pay, and what new credit you request. It is a current snapshot of your credit performance.
Do's & Don'ts for best credit scores
Do get your credit report and check it for errors. These reports are available from the three main credits reporting agencies and from Fair Isaac Company. They cost from $12.95 - $34.95, but are worth the expense.
You can order these online at:
Note: There are other web sites that offer free credit reports. However, some of them may use methods that result as a "hard inquiry" on your credit history, which lowers your score.
Don't close out old accounts. Keeping them with no or a little balance helps your credit score in the length of credit history and amount of unused credit available. If you close out accounts, close the most recent ones.
Do get your credit cards balances to below 30% of credit line. This increases the amount of unused credit available and is good for your score.
Don't consolidate your credit card debts using a new credit card. This adds one more creditor and does not reduce the amount of debt.
Do pay the bills when they come in. Don't wait until just before they are due. Paying early can help. Paying late hurts.
Don't open a new store account unless you must. Resist the temptation. Each new account is another credit inquiry that counts against you. Older credit helps, newer credit hurts.
"Creditors have better memories than debtors" - Benjamin Franklin
Accident reports can be
funny
In the "heat of the moment" folks involved in accidents can say some pretty strange things that often get into the official accident report. Here are a few you'll find amusing:
"The telephone pole was approaching fast. I was attempting to swerve out of its path when it struck my front end."
"I pulled away from the side of the road, glanced at my mother-in-law. And headed over the embankment."
"The guy was all over the road. I had to swerve a number of times before I hit him."
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Will wildfires and Isabel raise
rates?
Probably not because insurance companies must have reserves
to cover disasters like these. Not all carriers were impacted. But it sure
can't help. If profits are reduced then more revenue must be generated
from somewhere. Time will tell.
It was
very reassuring, when watching the TV coverage of the wildfires, to see
insurance adjusters handing out large checks to people who lost their
homes. That's what insurance is for - to protect our assets and
family.
Happy Thanksgiving from
us
Thanksgiving will soon be here. A holiday for
good food, family, and, most of all, a time to reflect upon and be
thankful for all our blessings.
We wish to thank you for your support and trust. We value you and appreciate the trust you place in us.
Without you, we wouldn't be in business.
Thank you. May you and yours have the best Thanksgiving ever!
"On Thanksgiving
Day, all American families sit down to dinner at the same
time-halftime."-Anonymous
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