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Why Your Credit Rating Score Is So Important

  • Published: 2014-08-22 (Revised/Updated 2017-04-27) : Author: Insurance Information Institute : Contact: www.iii.org
  • Synopsis: Information regarding building and maintaining a good credit rating or score and why it is so important for your future.

Main Document

"By law, you are entitled to one free credit report from each of the three reporting agencies once a year."

It's All About The Numbers: Why Credit Is Important - to Your Insurance, And Your Life.

Having good credit can help you in a surprising number of ways. A good credit history can result in getting that dream job, lower interest rates on car loans and mortgages, and better rates on your insurance, according to the Insurance Information Institute (I.I.I.).

With a solid credit rating in hot markets like Boston, New York City and Seattle, renters will have an easier time finding an apartment and homebuyers may be the first to view properties, giving them an inside edge. It can also lower insurance costs.

While insurance represents only about 5 to 7 percent of a typical housing payment, when you're buying a home, you want to save wherever you can. Many insurance companies give discounts on homeowners policies for those with good credit.

Credit Scores vs Insurance Scores

Insurance scores and credit scores differ. Credit scores predict credit delinquency, while insurance scores predict insurance losses.

Both are calculated from information in a credit report, such as outstanding debt, bankruptcies, length of credit history, collections, new applications for credit, number of credit accounts in use, and timeliness of debt repayment.

Insurers or scoring agencies then calculate the insurance or credit score by assigning differing weights to the favorable or unfavorable information in the credit report. Information such as income, ethnic group, age, gender, disability, religion, address, marital status and nationality are not considered when calculating an insurance score.

Credit and insurance scores measure how well individuals manage their money - not how much money they make. And actuarial studies show that how a person manages his or her financial affairs is a good predictor of insurance claims. Statistically, people with a low insurance score are more likely to file a claim.

The good news is, most people have good credit and most people will pay less for insurance than they would if insurance scores weren't considered.

How to Build and Maintain a Good Credit History

The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies - Equifax, Experian, and TransUnion - to provide you with a free copy of your credit report, at your request, once every 12 months. For more information, go to the Federal Trade Commission's Web site on credit. Free annual credit reports can also be ordered from AnnualCreditReport.com

If you find yourself unable to meet your financial obligations, contact your creditors to see if you can negotiate a more manageable payment schedule. By contacting your creditors as soon as problems arise, you might avoid a "Bad Debt" report to the credit bureau. Also consider working with a legitimate credit counselor. The sooner you can begin to manage your credit and pay on time the better your credit report will be over time.

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