Thursday, November 13, 2008

What bad credit really costs you Part 3

The insurance factor

A low credit score can also cost you more when it comes to your auto and home insurance.

Someone with a credit score of approximately 650 or higher could receive a discount of anywhere from "a few percent to 15% or even more" says Robert Hartwig, chief economist for the Insurance Information Institute.

Insurers use credit scores as one of the factors in determining what's known as an insurance score.

"We're not looking to see whether you're worthy for credit; we're trying to find the elements in the credit profile that correlate with loss behavior for insurance," says Hartwig.

Numerous studies have found that people with lower credit ratings file more claims. There are some theories as to why this is so. "Individuals who have credit problems may well be more likely to defer important maintenance on their cars and their homes," Hartwig suggests. "So those bald tires don't get replaced, the brakes don't get fixed, the leaky roof doesn't get repaired and so on and so forth."

The impact of credit scores on insurance scores varies from insurer to insurer and state to state. Some insurers only use insurance scores for screening new customers, while others routinely check the credit of existing policyholders when it's time to renew their policies. But consumers can improve their chances of qualifying for a lower premium rate by keeping their credit score in the mid-600s or above, Hartwig says.

No one wants to throw away money. But by failing to take steps to improve your credit score, you could be giving up thousands of dollars a year. The best way to improve a blemished credit rating is to pay your bills on time and keep debt to a minimum, says Paperno.

"Everyone should work hard to maintain a strong credit rating," says Hartwig. "If you work hard, you build a good credit rating and if you maintain it over time it has many, many benefits."

By Tamara E. Holmes,

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