TOP DRAWER ARTICLE

Credit Scoring
by
HL Carpenter

Credit scores, which are calculated based on your history of making timely loan payments and other financial information, are used to assess your creditworthiness. Think of them as the adult version of your high school grade report, with similar pass/fail results. For instance, if you try to finance a car or apply for a mortgage, the lender will check your credit score before granting – or denying - credit.

You may already be familiar with credit scoring as it applies to loans. But did you know insurance companies might also review your score to determine if you’re a good risk for policies such as homeowners or personal auto? Along with other details, your score can affect the premiums you pay.

Example: Statistics show that single people, inexperienced drivers and men have more accidents. Combining these factors with a low credit score could trigger a higher auto insurance premium.

Some states have laws that affect how – or if – an insurance company can use your credit score. In Florida, for instance, insurance companies are not supposed to use your credit history against you if you are dealing with unexpected medical bills or the death of a spouse.

Other protections: Depending on where you live, companies may not be able to deny coverage due to an insufficient credit history. And insurers are typically required to inform you if your credit score has an adverse effect on your premium.

What should you do if you discover that’s happened? Take advantage of recent legislation and order a free copy of your credit report. Then make sure the information in the report is accurate. If it is, work on establishing a better credit score by reducing excess debt and making payments on time.

Originally published June 2005.

Last update: January 8, 2011