YOUR CREDIT

Insurance Information Institute  

Credit is a financial fact of life. A solid credit history will help when applying for a job, renting an apartment or car. When qualifying for utilities, a good credit history can help you avoid having to pay a large security deposit. It will also help save money on insurance and loans to finance a home, car or small business. In fact, building and maintaining a solid credit history is one of the most important things you can do to insure your financial well being.

How does my credit history affect my life?

Your credit history can work for you or against you. Your proven ability to manage your money and meet your financial obligations is an indication of your maturity and stability and can open many doors. Prospective employers, landlords, lenders and even your insurance company view a strong credit history as a positive sign that you will meet your obligations and responsibilities to them as well. A poor credit history could result in not getting that apartment or dream job, and paying more for insurance coverage and higher interest rates on your mortgage and other loans.

What does my credit rating have to do with purchasing insurance?

Credit scores are based on an analysis of an individual’s credit history. Insurers often generate a numerical ranking based on a person’s credit history, known as an “insurance score,” when underwriting and setting the rates for insurance policies. Actuarial studies show that how a person manages his or her financial affairs, which is what an insurance score indicates, is a good predictor of insurance claims. Insurance scores are used to help insurers differentiate between lower and higher insurance risks and thus charge a premium equal to the risk they are assuming. Statistically, people who have a poor insurance score are more likely to file a claim.

How can I build and maintain a good credit history?

Your proven ability to manage your money and meet your financial obligations is the basis of your credit score. The best way to build a solid credit score is to make a habit of always paying your bills on time in full each month. Your goal should be to build a long history of reliable bill paying behavior.

Another way to build a good credit score is to have no more than 3 or 4 credit cards and to hold them for a long period of time. Keep balances low and use no more than 30 percent your available credit. This, of course, means resisting the temptation to accept pre-approved card offers in the mail or retail credit cards even though there may be a discount available for opening a new account.

To maintain your good credit history, check your credit report every year. Look for errors and correct them as soon as possible. By law, you are entitled to one free credit report from each of the three reporting agencies once a year. Go to www.myfico.com for more information.

The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies—Equifax, Experian, and TransUnion—to provide you with a free copy of your credit report, at your request, once every 12 months. For more information, go to the Federal Trade Commission’s Web site on credit.

Free annual credit reports can be ordered from AnnualCreditReport.com.

For information about your credit score, go to MyFICO.com.

What is the difference between my credit score and my credit history?

Your credit history is all the information—such as credit accounts, balances due and details of your payment history—contained in your credit report. This information is collected and updated regularly by the three reporting agencies (Equifax, Experian and TransUnion). Your credit report also contains information about bankruptcies, overdue debt from collection agencies, foreclosures, liens and judgments. Whenever you apply for a loan or a line of credit, you authorize your lender to ask for a copy of your credit report. This is how inquiries appear on your credit report.

Your credit score is a numerical calculation based on the information in your credit report. Your credit score, also known as your FICO score, is used by lenders to determine your credit worthiness. Your score will go up or down based on your payment history, account balances, new inquiries and a number of other factors. For more information visit MyFICO.com.

Suppose I get in over my head? How can I repair my credit history?

If you do accumulate debt, you can take steps to improve your credit history by consolidating debt and paying off outstanding loans. But be warned, applying for new credit and opening new accounts frequently can make things worse. The number of inquiries on your credit report will affect your score as a large number of inquiries on your report will make lenders think you are planning to run up a lot of debt. However, the mass inquiries made by credit card lenders, who are trying to decide whether to send you an offer for a pre-approved card, do not hurt your score—unless you actually take them up on their offers.

If you find yourself unable to meet your financial obligations, contact your creditors to see if you can negotiate a more manageable payment schedule. By contacting your creditors as soon as problems arise, you might avoid a “Bad Debt” report to the credit bureau. Also consider working with a legitimate credit counselor. The sooner you can begin to manage your credit and pay on time the better your credit report will be over time.

How can I find a legitimate credit counselor?

Reputable credit counseling organizations advise you on managing your money and debts, help you develop a budget, and usually offer free educational materials and workshops. Their counselors are certified and trained in the areas of consumer credit, money and debt management, and budgeting.

A reputable credit counseling agency should send you free information about the services it provides without requiring you to provide any details about your situation. If a firm doesn't do that, consider it a red flag and go elsewhere for help.

When you’re choosing a credit counseling agency, check for the following:

• The counselors are accredited or certified by an outside organization.
  
  
  
• The agency offers a range of services, and is not trying to push a specific product, such as a Debt Management Plan..
  
  
  
• The price is clearly stated up front and there are no hidden fees.
  
  
  
• No significant consumer complaints have been filed against the agency or its counselors. You can check this with the Better Business Bureau, your state Attorney General or local consumer protection agencies.

Beware of companies that guarantee they can remove unsecured debt, that promise that unsecured debts can be paid off with pennies on the dollar, or that demand payment of a percentage of your savings. Reliable credit counselors help people manage their money better and, if appropriate, can help get better interest rates on loans and set up a realistic repayment plan that is acceptable to creditors. They cannot “fix” bad credit or pay off debts for less than is owed. If it looks too good to be true, then it probably is.

For more information go to: the Federal Trade Commission’s Fiscal Fitness section, the National Foundation for Credit Counseling, and the American Center for Credit Education.

© 2015 TLC Magazine Online, Inc.