You may not have thought of it this way, but insurance companies are like big bushel baskets. Their policyholders put money into the basket and the insurance companies take money out of it when they pay claims. Their objective is to make sure their policyholders put more money in the basket then they’re required to take out. The way they do this is by “rating” their policyholders.
Your auto insurance
Here’s an example of how this works. Let’s say that you’re 24 years old, single and need auto insurance. Your rate will be high because you’re a member of the under-25 age group and this group has many accidents. When you turn 25, like magic, your rates will drop 50%. This is because you’ve now become a member of the 25-to-29 age group, which has about half the accidents as those under the age of 25.
Tickets and accidents
You will also see the cost of your auto insurance go up if you get a ticket, especially a speeding ticket. It will also increase if you have an accident because this moves you from a group that has had no accidents to one that has had an at-fault accident.
Your credit report
Beginning a few years, insurance companies started looking at your credit report as well as your age, marital status and accident record. This is because they discovered that people who have great credit have many fewer claims than those who have bad credit. If you have a high credit score, your premium can be discounted by as much as 50% or more, depending on your insurance company.
Other ways you can be affected by your credit report
Whenever you apply for credit of any kind, the first thing the lender will do is check your credit report or, more specifically, your credit score. The reason for this is because your credit report can be long and complicated. Most lenders don’t want to spend time pouring over it when they can just check your credit score. If you have a low credit score of 600 or below this will have a negative impact on your interest rate. For example, if ypu had a credit score of, say, 500 and applied for a mortgage, your interest rate might be 8.583%vs. the 5.780% you’d pay if you had a score of 760 or above. In other words, it pays to have a good credit score in more ways than one.
If you don’t know your credit score
As you can see, it’s important for you to know your credit score. If you don’t know it, you can get your FICO score on the website www.myfico.com. You can either pay $19.95 for it or sign-up for a free trial of the company’s Score Watch program. Alternately, you could get your credit score from one of the three credit reporting bureaus – Experian, Equifax and TransUnion. The reports you get from these bureaus will not be your true FICO score as they have their own formula for calculating credit scores called VantageScore. However, it should be close enough for you to see if you have a good or bad score.
How to improve your credit score
The sad fact is that if you have a low credit score there is nothing you can do to improve it quickly. You should review your credit report to find your problem areas and then go to work to improve them. For example, if your report shows late or skipped payments you need to make sure that you make all of your payments and on time without fail. You should also check your debt to credit ratio. This is the difference between how much credit you have available and how much you’ve used. It’s expressed as a percentage point and you should keep it below 35%. If it’s much higher than that, you need to pay off as many of your debts as possible to improve that ratio.
