Credit scores are statistics now considered as an indispensable part of rating, underwriting, and determining plan eligibility by insurance companies. Insurance agencies use credit scoring to determine how probable a customer or client is of repaying his or her debts. However, critics of the practice argue that the rationale behind this common practice is not sound. Many suggest that a credit score does not reflect the fiscal responsibility of the consumer as it should and that it rather is a measure of the likelihood that a customer will file a claim. This has caused the practice of credit scoring to come under much debate and scrutiny. Customers often require an explanation as to why insurers pull their credit scores. The explanation? Insurers often seek reasons to raise premiums. To better understand the pool of consumers that their agencies tend to attract, it is necessary for insurers to know how consumers may try to change their credit score to their benefit. Since it will inevitably be a topic of conversation between every insurance agent and their consumer, they must know this subject thoroughly to properly handle this controversial subject.
Responsible consumers with high scores have a tendency to pay their bills in a timely fashion and not overextend. However, according to consumerreports.com and bankrate.com there are additional ways in which consumers can improve their credit scores and fight unnecessarily high prices.
One of the ways to improve credit score is by eliminating small balances on credit cards. How many balances a report states can lead to the calculation of a lower credit score. Customers can raise their credit score by paying off all of their credit cards containing small balances and changing to a routine use of one or two credit cards.
Negative items disappear after seven years on a customer’s report. However, given the length of this span, pending, unpaid debt and bad accounts still have a damaging effect on the credit score. One way customers combat this is by leaving old debts on their credit report after the seven year threshold . Those debts which are eventually paid, contrary to the beliefs of some, will have a positive effect on a credit score if explicitly demonstrated in the report.
Even if a customer pays their credit card balance in full on a monthly basis, consistently charging exorbitant amounts on cards has an adverse effect on credit ratings. He or she can counteract this and build credit score by maintaining relatively low charges on each card per month. This generates a healthy credit/debt ratio that demonstrates responsible card usage when pulling a credit score. Additionally, customers may make multiple payments on larger balances in a month to their card issuer. Further, consolidating multiple credit card balances with a personal loan can boost a customer’s credit score.
Another way to improve credit rating is by simply avoiding some kinds of credit cards and using only those cards the credit scoring system favors. Many credit-scoring models punish the use of certain credit card accounts from the specific places (e.g. ,local tire dealers, service station finance-companies, department stores, retailers, and auto-parts stores). Using more frequent models like Visa, MasterCard, Discover, or AmEx is better for a credit score.
Most commonly, a customer can simply pay bills in a timely fashion and regularly monitor his or her credit score. He or she might also ask for an extraordinary life circumstances exception in response to receiving a notice of adverse action, which comes when credit scoring is the cause of the following: reduced limits, higher premiums, coverage denial, or policy nonrenewal.
Insurance customers often seek to improve their scores through these methods and thus avoid the high prices that come with a poor credit score. Insurance companies, as lenders, must have assurance that the customer will repay his debts. Credit scores, while providing them with that, are often calculated using what some consider unfair parameters. Regardless, knowing how customers consolidate their issues in the practice of credit scoring will help auto insurers understand their customers better and know how to approach the subject of credit scoring in any given scenario.