I was helping a new client with his home insurance earlier this week. I’d made the final modifications to the application and sent it to him to be electronically signed. We reviewed it together by phone and he wanted to ask a couple of questions about a notice on the last page of the application. The notice mentioned he had not received the “best” pricing due to a couple of items that were returned on his insurance score including inquiries.
He was curious what this meant so I outlined for him what they were really saying. Most insurance companies use the term “insurance score” which translated means credit score. In this client’s case, he was getting “dinged” on his score for the number of inquiries made.
Unlike most people I talk with, my new client was aware that credit does influence what a person pays for the home and car insurance. This practice began a little over 10 years ago when insurance companies noticed the link between credit and claim frequency. The study concluded that people with poor credit are more likely to file a claim than people with good credit. Statistical studies were performed that demonstrated credit as a predictor of future claim activity. The result was:
- The better the credit the lower the premium
- The lower the credit or insurance score, the higher the premium
Texas permits insurance companies to use a person’s credit score to help determine the premium or amount they pay for the home and car insurance. Other states permit this practice too, however it varies from state to state. Some permit credit based scoring to be used on property insurance only such as home and auto. Other states allow it to be used on other policy types such as umbrella, life, and more.
I’m routinely asked what credit score and driving record or home claims have to do with each other. I’ve also had people tell me this practice is unfair. To be honest, credit scoring has little to do with past activity whether related to home or car insurance. It is a predictor of future claim activity and past claims or tickets are weighted on their own.
I also understand how the use of credit may be unfair and penalize someone who’s gone through a financially painful time in their life. People go through financially difficult times due to illness, job loss, divorce, etc. I went through a similar difficult period due to a divorce. My rates were higher then than they are now, but my credit is also better now than it was then. I am not fond of credit scoring, but it is something we all live with, either with lower or higher rates.
One of the best strategies I can give someone for lowering their overall insurance rates is to improve their credit and that starts with ordering your free credit report. This can be done once a year. It won’t give you your numeric score but it will help you see what the bureaus have noted on you. I do recommend you pay for the credit score versions of your reports. Knowing your number can be very helpful in determining what your goal is to a better score.
In order to improve your score, I recommend you take these 8 steps to improve your credit.
- Correct the mistakes: Most people have some discrepancies or even inaccuracies on their credit report. Start with the credit bureaus first to get these items corrected and then get with your individual creditors if needed.
- Pay on time: Are you paying on-time or late? Pay on-time and improve your score.
- What’s the balance: Being over the limit really knocks your score down. Get your balances under your limit. DeAnna Morgan, a mortgage loan officer and friend relayed to me the FICO score is negatively impacted with any unpaid balance greater than 30% of your limit.
- Track spending: Record everything you spend your money on with a credit card, debit card, and cash. Do this for at least 30 days, preferably 90, and you’ll discover how your money flows.
- Put it on the calendar: If all your bills are hitting at the beginning of the month, divide when they’re due. Many companies will allow you to change the day of the month they’re due so split some into the first of the month and others into the middle of each month. This helps with cash flow and improves payment history.
- Make a budget: There are a ton of budgeting tools available through most bank’s websites (check your main account page), Quicken, www.mint.com. Having a budget gives you better control over your money instead of your money over you.
- Pay off debt: Total up the amount you owe on credit cards, car loans, student debt, home equity lines of credit and anything else. Then focus on one to pay off. This can either be the smallest one or the one with the largest interest rate. Pick the right one for you and start. Today!
- Spend less: I know, it sounds easy, but this is where the tough choices will be made. Eat out less, pack your lunch, skip the sale at Macy’s, shop for gas, change where you buy groceries (use coupons), or don’t upgrade the phone just yet. Get creative about ways to cut your spending.
Achieving better credit takes time, it doesn’t happen overnight. Improving your credit and becoming financially free has many benefits, one of which is paying less for your insurance! What suggestions do you have to help someone improve their credit? Share them with us in the comments section of our blog or on our Facebook and Google + pages. We’ll all learn something and become financially stronger for it!