Banks and lenders aren’t the only financial institutions out there who rely on that magical three-digit score to determine how much to charge.
Nowadays, insurance companies are looking at consumer credit history as a rating factor to determine how much we should pay for things like homeowner’s insurance.
The concept of using credit history to determine interest rates on home loans is well documented and universally accepted, but its more recent link in determining insurance rates is more complicated and controversial.
You may wonder how credit scoring and insurance are correlated, and for good reason.
Well, to save you some time, insurance companies have crunched the numbers and believe credit history can predict a consumer’s propensity to file a claim for damages.
It seems individuals who have a history of being more financially responsible are more likely to keep up on home maintenance and be more reliable homeowners overall, which tends to lower the potential for filing claims during a policy period.
While individual cases may vary, remember that insurance companies are potentially dealing with millions of insureds, and the overall numbers appear to support this conclusion.
The predominant opposing argument states that the practice of reviewing credit history to determine insurance rates is discriminatory, as it unfairly targets and takes advantage of those in a less than ideal financial situation by charging them additional premium.
They cite the fact that insurance is mandatory, whereas the option to borrow money from the bank is generally a choice.
Similar to mortgages, those with better credit scores will be favored when it comes to determining the premium.
Of course, there are always extraneous circumstances behind individuals’ credit scores that may not paint the most accurate picture of a borrower or insured’s true financial integrity.
Also, errors on credit reports may cost you unfairly. Regularly check your credit report to ensure its accuracy, a practice we all know is key to being financially responsible.
This topic is currently under review by the legislature of many states for the reasons mentioned above.
Check with your State Department of Insurance for more information.
Source: zillow.com