Understanding Your Credit Score
By Mike Wayman
Many consumers do not understand the importance of knowing the criteria used to determine their credit score. Knowing these details helps when you apply for a loan, seek to modify an existing loan, apply for a job, or even change auto insurance companies.
The credit score is comprised of five categories: Your payment history, the total amount you owe on all existing loans, the length of your credit history, the amount of new credit you have, and the types of credit you use. Lenders look at how well you make payments on existing loans and how many times any payments have been late. The also look at the total amount you have outstanding on loans, and compare that to your total worth. For example, owing more than the value of the property you own is always viewed negatively.
Also considered is how long you have been using credit. Someone with a history of using credit successfully for twenty years usually fares better than someone who just got his or her first credit card six months ago. Lenders look at how much credit you already have, and determine whether you are overextending yourself by applying for more, and lastly they look at the types of credit you use and whether you typically carry unpaid balances on store charge cards or pay off balances regularly.
Essentially, your credit score affects every aspect of your financial life, so it is important to know where it comes from.
Yes! Bad Credit Can Affect Your Car Insurance Rates
By Mike Wayman
Not only your ability to obtain a home mortgage or credit card depends on your credit rating, but now your auto insurance rates also can be affected either positively or negatively by your credit score. For about the last ten years, insurance companies have used applicant’s credit reports to help determine the potential risk of providing auto insurance. A negative credit rating is perceived as a higher insurance risk, while a higher credit score is perceived as a lower risk applicant and therefore could very well result in lower insurance rates.
The problem is that there are inconsistencies with this whole idea. It seems erroneous to assume that if a person has a high credit rating, hence it is assumed they either earn a high wage and/or have few expenses, that they are necessarily a more responsible or capable driver. Conversely, it seems ridiculous to think that those who earn lower wages or who have encountered financial difficulties resulting in a lower credit score will automatically be poor drivers and thus a higher insurance risk. But this is the way insurance companies are viewing credit histories with regards to prospective clients.
Of course, driving history is indeed considered as well, so maintaining a clean driving record will help even if your credit rating is low. Avoid accidents, pay any citations in a timely manner, and hope that your insurance agency will weigh more heavily on the side of your ability to drive than on the money in your pocket.
