More and more insurance companies are checking policy-holders’ credit scores as they calculate annual premiums. Consumer advocates claim the practice discriminates against low-income buyers, and they have filed more than twenty different class-action lawsuits to break the connection between credit scores and insurance costs. The insurance companies counter, however, consumers’ credit scores give accurate indications of clients’ trustworthiness and responsibility. They argue a person with a higher credit score ought to pay less, because the score proves he or she poses less risk of serious loss. While the lawyers and legislators slug it out, you should plan as if your credit-worthiness will influence how much you pay for auto and homeowner’s coverage. To control your costs, take four basic steps:
• Adjust your insurance coverage and deductibles. When you insure both your car and your home, you must satisfy your lender’s requirements; and some especially mean-spirited lenders, already worried about your credit-worthiness, will consider failure to provide proof of insurance as a form of default, threatening repossession or foreclosure. You can, however, adjust your premiums by cutting frills, raising your deductibles, and taking a few pro-active safety measures. Consider raising your theft and collision deductibles to $1000, but be careful not to raise your deductibles so high you end-up stranded after an accident. Check with your agent to see how you similarly can trim, adjust, and tailor your homeowner’s policy to fit your budget. Look at the advantages of “bundling,” and find-out about discounts for “one-pay” or shorter payment periods. Many insurance companies also offer deep discounts for your completion of driving safety classes and for upgrades to your home security equipment. Adding a few fire extinguishers and a carbon monoxide detector may save you up to ten percent.
• Check and correct your credit score. The three major credit reporting agencies allow you one free credit report each year, and financial experts recommend you seize the opportunity created by tax preparation to include a credit review as part of a comprehensive financial wellness check. Go over each report with a very fine-toothed comb, because they contain information from different sources, and each inevitably will contain mistakes that cost you dollars every time your take a loan or use a credit card. Negotiate directly with creditors to correct the mistakes. If your creditors refuse to change their reports, submit notes to the credit reporting agencies, so that you get credit for good behavior.
• Balance your income-to-debt ratio. Most American families do not write-out and follow household budgets, and most people do not know the formulas lenders follow as they calculate families’ income-to-debt ratios. Make yours one of those rare families that manage their domestic economies to turn a profit: Write-out a realistic monthly budget, and then give it the force of law. The family’s chief financial officer must enforce the rules, insisting a family member’s failure to plan cannot change the budget numbers, and advising, “Plan better next month.” The domestic CFO also must follow an unbreakable rule: put ten percent of each paycheck into savings. A family cannot build security and wealth without following that rule, and contributions to savings build your “net worth,” a key determinant of your credit score.
• Develop a credit-conscious financial strategy. You do not need a degree in economics to understand the fine print on your monthly statements from your creditors. Although the lawyers have done their best to mystify you, the message remains the same: pay what you owe, and pay on time. For most creditors, “on time” means precisely on the due date; even when they allow grace periods, creditors want their money on the day it is due, and they penalize even for falling into the grace period. If you have fallen behind with a creditor, see if you can renegotiate the terms of your agreement and adjust the payments, so that your credit report will read “current.” Most of all, take aggressive measures to eliminate all of your “unsecured debt”—the jargon term for credit cards and retailers’ revolving charges.
The vast majority of American families are struggling to recover from the Great Recession’s ravages, but signs of overall economic recovery should encourage you to put your household economy on the path to recovery. If you do not understand what it takes to make your money work for you, and if you stress over your money more than you manage it, take an online personal finance course. The more you know about money and credit, the more of both you will have.
Christopher Jensen is a writer offering advice on how to get an auto insurance quote online for those searching formaine auto insurance rates.
