Understand why credit-based insurance scores are used and how to improve them. Get the Money Girl book at http://MoneyGirlBook.com
Money Girl
331 MG What You Should Know About Credit-Based Insurance Scores
[MUSIC] Hi, everyone. Thanks for downloading the Money Girl podcast. I'm your host, Laura Adams. [SOUND] If you're a regular Money Girl reader or podcast listener, you already know that credit is an important part of your financial life. It affects what you have to pay for interest on a car loan, mortgage or credit card. But many people don't realize that even if you don't have credit accounts or debt, your credit still determines how much you have to pay for certain types of insurance. In this episode, I'll tell you what a credit-based insurance score is, why it's used, how to raise it, and the states where using your credit to set rates is legally prohibited. A credit-based insurance score is a rating used by most insurance companies to help predict your risk for certain types of policies, such as auto and home insurance. Studies have shown that consumers with good credit file fewer insurance claims and therefore are less risky customers. And these studies have been done by federal and state regulators, universities, insurance companies, and independent auditors. In order for an insurance company to be profitable, it has to take in more money in premiums than it pays out in claims. So they're interested in how often you're likely to file claims and how expensive those claims will be. The idea is that the way you handle your finances says a lot about how responsible you are in other areas of your life, like driving a car or maintaining your home. So instead of raising rates across the board, insurance companies reward those with good credit by charging them less. It's important to understand that an insurance score is different from a regular credit score that's typically used by a lender or credit card company. Both types of scores use information in your credit report. However, they're trying to forecast different things. Insurance scores aim to predict your likelihood of having an insurance loss, while credit scores aim to predict how likely you are to repay a debt. When you apply for insurance, the carrier purchases your credit history from one or more of the three nationwide credit agencies, like Equifax, Experian, and TransUnion. Your information is added to the insurer's proprietary scoring model, or to one created by another company, like TransUnion's insurance risk score. Your credit-based insurance score is never calculated using information such as your age, gender, race, religion, employment, or any other information that's not found in your credit report. Now that we're in Q4, it's a good time to start thinking about making memories with the people you love most before the end of the year. We put a lot into the time we spend with our loved ones. So you want to extend that care, comfort, and peace of mind to what happens when you're gone. 41% of people don't have the life insurance coverage they need. Policy genius makes finding and buying life insurance a breeze. With Policy Genius, you can find life insurance policies at start at just $292 a year for a million dollars of coverage. And some options are 100% online and let you avoid unnecessary medical exams. Policy Genius combines digital tools with the experience of real licensed agents. You can compare quotes from America's top insurers side-by-side for free with no hidden fees. They have an amazing licensed support team that helps you get what you need fast so you can get on with your life. They answer questions, handle paperwork, and advocate for you throughout the process. Policy Genius is the country's leading online insurance marketplace. And even if you already have life insurance through work, remember, it may not protect all your family's needs or follow you if you leave your job. So save money and time on providing a financial safety net for your family. Head to policygenius.com or click the link in the description to get your free life insurance quotes and see how much you can save. That's policygenius.com. So what is an insurance score based on? Well, it's similar to the factors used to calculate a regular credit score, like payment history, credit utilization, amount of debt, length of credit history, credit inquiries, and legal actions, such as filing for bankruptcy. In other words, you can increase your insurance score when you pay loans and credit card bills on time, don't max out credit cards, and never apply for more credit than you really need. But insurance scores hone in on patterns of financial management, for instance, applying for one credit card over a 12-month period isn't likely to have a negative effect. But getting several within a short period of time typically hurts your insurance score. Additionally, other types of red flags may include having multiple mortgages or auto loans with high average balances. These may be a predictor that you have a home claim or an expensive auto insurance loss in your future. When you apply for a new credit account or even an insurance policy, a hard inquiry is made on your credit report that can temporarily ding your credit score. However, under the credit models used by most insurance companies, the only inquiries that hurt your insurance score are those for new credit accounts, not new insurance applications. Therefore, due to the differences in insurance scores and credit scores, it's possible to have good credit but a poor insurance score. That means you'll pay more for insurance or in some extreme cases be denied for a home or auto policy. If an insurance company does deny you coverage due to information in your credit history, you generally have the right to get a free copy of your credit report. In some cases, you may have errors in your credit file that are dragging down both your insurance and credit scores. Always report errors and get them corrected as quickly as possible. For a video tutorial that shows you step-by-step how to check your credit report and correct errors, get my free credit score survival kit. Just visit smartmoves-to-grow-rich.com and click the button that says "credit score survival kit." I'll also include a link in the transcript for this show. Insurance laws vary depending on where you live because insurance is regulated by states, not the federal government. In recent years, a few states have passed laws that prohibit insurers from using credit to set rates. For instance, if you live in California, Massachusetts, or Hawaii, insurers can't use your credit history as a factor when setting rates for auto insurance. And if you live in Maryland, home insurers there are prohibited from considering your credit. However, no state allows credit to be the sole factor in setting insurance rates. There are many other variables that come into play, including your driving record, annual mileage driven, and vehicle model. Home insurers must consider numerous property features, such as age, construction type, and location. To sum up, by paying your bills on time and using credit wisely, you can build a good credit history that helps you qualify for lower, auto, and home insurance premiums in most states. If we haven't connected yet on social media, just go to Facebook and do a search for MoneyGirl. On Twitter, my username there is @laraatoms, L-A-U-R-A-A-D-A-M-S with no space. And for more exclusive money tips that you won't find on the podcast, be sure to sign up for the free MoneyGirl newsletter. Everything I've mentioned is on the MoneyGirl page at quickandertietips.com. To read a transcript of this show, look for episode number 331, called "What You Should Know About Credit-Based Insurance Scores." I'm glad you're listening to Ching. That's all for now, courtesy of MoneyGirl, your guide to our richer life. [MUSIC] [BLANK_AUDIO]