Need Credit or Insurance? Your Credit Score Helps Determine What You’ll Pay

Ever wonder how a lender decides whether to grant you credit?

For years, creditors have been using credit scoring systems to determine if you’d be a good risk for credit cards, auto loans, and mortgages. These days, many more types of businesses — including insurance companies and phone companies — are using credit scores to decide whether to approve you for a loan or service and on what terms. Auto and homeowners insurance companies are among the businesses that are using credit scores to help decide if you’d be a good risk for insurance. A higher credit score means you are likely less of a risk, and in turn, means you will be more likely to get credit or insurance — or pay less for it.

The Federal Trade Commission (FTC), the nation’s consumer protection agency, wants you to know how credit scoring works.

What is credit scoring?

Credit scoring is a system creditors use to help determine whether to give you credit. It also may be used to help decide the terms you are offered or the rate you will pay for the loan.

Information about you and your credit experiences, like your bill-paying history, the number and type of accounts you have, whether you pay your bills by the date they’re due, collection actions, outstanding debt, and the age of your accounts, is collected from your credit report. Using a statistical program, creditors compare this information to the loan repayment history of consumers with similar profiles. For example, a credit scoring system awards points for each factor that helps predict who is most likely to repay a debt.

A total number of points — a credit score — helps predict how creditworthy you are — how likely it is that you will repay a loan and make the payments when they’re due.
Some insurance companies also use credit report information, along with other factors, to help predict your likelihood of filing an insurance claim and the amount of the claim.

They may consider these factors when they decide whether to grant you insurance and the amount of the premium they charge. The credit scores that insurance companies use sometimes are called “insurance scores” or “credit-based insurance scores.”

Credit scores and credit reports

Your credit report is a key part of many credit scoring systems. That’s why it is critical to make sure your credit report is accurate. Federal law gives you the right to get a free copy of your credit reports from each of the three national consumer reporting companies once every 12 months.

The Fair Credit Reporting Act (FCRA) also gives you the right to get your credit score from the national consumer reporting companies. Once per year you can get a copy for free. When you get your score, often you get information on how you can improve it.

Increase Credit Score – How Do Credit Scores Work?

Although many mortgage companies and finance experts have been warning consumers about the importance of maintaining a good credit score, many people fail to recognize the value. When applying for any type of credit, potential lenders review our credit history and base loan approvals on its contents. If applying for instant credit, lenders simply use credit scores. Here are a few tips to help you understand how credit works, and tips for boosting your personal rating.

The Value of Credit Scores

Credit scores are a valuable tool for lenders. Because banks and other lending institutions receive numerous loan requests on a daily basis, it is challenging determining which applicants should get approved.

Lenders have many methods for judging a person's credit worthiness. To speed up the process, several lenders begin by reviewing a credit score. To separate the good applicants from the bad, they establish a minimum credit score requirement. If your score falls below this requirement, it's an immediate credit denial.

Calculating Credit Score

Many factors play a role in credit scoring. Scores are between 300 and 850. The higher the score, the better the credit. Although having perfect credit is very hard, it is possible to maintain a good credit rating. This typically consists of scores above 680. Those who fall into this category usually qualify for prime rates on home loans, auto loans, and credit cards.

When calculating credit scores, several factors are taken into account. For example, payment history, outstanding debt, length of credit, and inquiries. Payment history and outstanding debts contributes largely to credit scoring.

Payment history with creditors is important because future lenders are curious as to whether you submit payments on time, or have a habit of being late. Moreover, having too much debt will have a negative effect on your score.

Raising Credit Scores

Little things can quickly boost your credit score. For starters, begin establishing a good payment history with creditors. Because payment history contributes to 35% of credit scoring, paying creditors on time is a great way to increase your score. Furthermore, reduce your outstanding debts. Debt contributes to 30% of scoring. Thus, the more debt you have, the lower your score. Keeping credit cards at their maximum limit is damaging. If possible, keep cards at about 25% of their maximum limit.

Improve Your Credit Score Before Buying a Home

Several months before you begin to look for a home, you should take steps to get "credit approved" for your loan. Start by making a list of all your existing loans and credit cards, with the company names, account numbers and monthly payment amounts. This will help you to analyze the information shown on your credit report. Include all closed loans and credit cards if these records are available.

1) Get a Financial Check-Up

Make an appointment with a good mortgage lender, and request a full credit approval. As a part of the approval process, your credit report will be ordered. It will include data from the three main credit reporting agencies - Equifax, Experian, and Trans Union. The report will show three credit scores - one from each agency. The interest rate and type of loan available to you is related to your credit score.

The assistance of a mortgage professional to help you to understand your credit report and offer suggestions on how to improve your score is invaluable. For the average person, interpreting a credit report and dealing with errors is a daunting task. Credit reports are filled with frustrating jargon and codes. They are not written for the general public to read. Even more intimidating is the task of communicating with credit agencies to dispute or correct information.

2) Correct Mistakes

Credit reporting agencies often have mistakes in their data. The information in your credit file is input by computers. A computer weighs your data using complicated mathematical formulas to arrive at a credit score.

Nearly everyone has paid bills late for one reason or another. Perhaps a bill was sent to a wrong address, or you have had a dispute with a vendor. It is likely that you have some issues on your report that should be disputed or corrected. Each of the websites of the three main agencies has a dispute resolution page. Feel free to use it.

3) Deal With Real Credit Issues

You may have had serious credit problems at some point in the past. Reviewing this may be emotionally draining, and will bring up the underlying situation that caused the credit problems. Get advice on how long the issues will remain on your report, and how to re- build your credit worthiness.

Or, you may have a persistent habit of overspending. In this case, you should talk with a financial advisor or personal counselor to help you work out of debt, and establish better habits. The National Foundation for Credit Counseling offers low cost assistance for serious credit problems. If you place yourself under their supervision to handle your debts, you will not be able to obtain new credit during the work-out period - which may be years. Before doing that, ask a mortgage lender or financial advisor if there is a way to redeem your credit without their supervision.

4) Check Your Credit File

A law, passed in 2005, requires the three main credit agencies to provide a free credit file disclosure each year. It has been suggested that you could order a file from the first agency in January, one from the second in May and one from the third in September. The central site where your file can be ordered is annual credit report dot com. The purpose of this law seems to be to help people find out if they are a victim of identity theft. This enables you to monitor your file for any new credit that did not come from you.

If you take advantage of the free credit file reports, you should check them for mistakes. Use the credit report that you reviewed with your mortgage lender to compare with the data in your credit file. Keep in mind that the free credit file disclosure is not a credit report. It does not include a credit score.

5) Understand Credit Scores

Less than 620 - Poor

620-680 - Average - You may need to put more cash down on your loan.

680-720 - Good

720 - 800 - Excellent

800-850 - Seldom seen

6) Play by the Rules

The information in your credit file is scored by these factors:

35% - Payment history - Paying bills on time is very important. Today many people use auto draft or pre-written checks through online banking to pay bills. These help to prevent late payments. If you want a good credit score, do not pay late!

30% - The relationship between your available credit versus how much you have used is an important factor in your score. If you are over 50% drawn against your available credit, this will count against you. For this reason, it helps to keep old credit card accounts open, even though you do not use them. They build up the total amount of credit available to you, relative to what you have charged.

15% - The length of credit history on each loan has an effect on your score. A more seasoned loan is scored higher. For this reason it is not a good idea to open credit cards offering low initial rates, then close them after a few months and open new credit cards.

10% - The number of inquiries made on your credit report affects your score. Each time you open a credit card or new loan, your credit information is pulled. Keep these to a minimum. A recent law has made it possible for people shopping for homes or autos to have multiple inquiries, from the same industry (mortgage or auto), done over a 30 day period without penalty. However, to be on the safe side, do not allow your credit report to be pulled unless absolutely necessary.

10% - The types of credit used may hurt your score. Loans from finance companies, signature loans, furniture loans and some retail store loans are considered a poor judgment because of their high rates, and may count against you.

7) Improve Your Credit Score

It is easy and necessary to borrow money. We customarily make everyday purchases using credit cards, and set up loans for homes, cars and other purchases. Your credit score is especially important in the purchase of your home. It will affect the type of loan available, down payment required, and interest rate charged. A low score can cost you thousands of dollars in additional interest over the years. Even insurance companies factor your credit score into their decisions. More than ever, you need a good credit score, or you will pay the price.

Finance providers, rental agencies, car dealers, insurance companies and credit card companies are not going to help you improve your credit score. In fact, they have an economic interest in charging you a higher rate. It is up to you to be proactive about understanding and improving your own credit score. A good time to start is when you begin the mortgage approval process for a home purchase. It is a good habit to have.

Improve Credit Score – Ways To Raise And Protect Credit Score

When a potential creditor pulls your credit report, they will learn your employment, address, and credit history. Details about credit history are their primary concern. For this matter, it is important to maintain a good payment history with creditors. This will likely result in a better credit score, which affords better financing options.

If your credit score is low, making an effort to raise your score will serve to your advantage.

Benefit of Regular and Timely Payments

There is no secret method to obtaining a good credit rating. Even if you are unable to achieve a very high credit score, it is possible to maintain a good rating by simply paying creditors on time. Late payments and skipped payments can decrease your score by several points. If irregular payments become a habit, your credit score will continue to decline.

On the same line of thought, making regular payments will increase your credit rating. When outlining a plan for boosting credit rating, begin by paying all creditors on time. If possible, submit payments a few days before the due date.

Reduce Debts and Keep Low Balances

Too much debt will have a negative effect on your credit rating. Most consumers with maxed out credit cards are able to keep up with minimum payments. However, excessive debts make potential lenders nervous. In this case, it may be difficult to obtain prime rates on home loans and auto loans.

Low credit card balances will not have a damaging effect on your credit rating. Consumers are encouraged to keep credit balances below 25% of the credit limit. If your balance exceeds this amount, take the necessary steps to reduce debts. This may include paying triple the minimum payments, transferring the balance to a 0% interest credit card, or obtaining a debt consolidation.

Ways to Protect Credit Rating

In addition to boosting your personal credit rating, careful credit report monitoring is essential. Sadly, millions of people become a victim of identity theft each year. Proving identity theft is difficult. Thus, victims often have to live with the effects of having their identity stolen.