It's bad enough that a few dings on your credit report can force you into higher-interest credit cards and loans. But did you know those dings can raise your auto insurance rates, too?
Yep, that's right. If you lower your FICO score -- the score that lenders and others use as a quick index of your credit-worthiness -- it can have an impact far beyond the account where the trouble started. Even if you don't have any dings, your score might be low enough to affect your insurance rates. If you don't use your credit cards, after all, the credit industry won't have a history of good credit to evaluate. You'll end up with a less-than-ideal rating. Insurance companies will see you as a less-than-ideal risk, and price your policies accordingly.
But my credit has nothing to do with my driving!
It certainly doesn't seem like it should. However, as a report issued last week by the Federal Trade Commission describes, insurance companies such as MetLife
Further, the FTC report supports the practice. According to the FTC, credit-based insurance scores "effectively predict the number of claims consumers file and the total cost of those claims" and "may allow insurers to grant and price coverage more efficiently, producing cost savings that could result in lower premiums." The report notes that every single one of the top 15 auto insurance companies uses these scores. Case studies in the report note the particular success of Progressive
So there you have it. And while several groups concerned about discrimination -- lower-income and minority populations are more likely to have lower scores, they say -- are hotly disputing the FTC's report and calling on Congress to ban the practice, it's unlikely to go away anytime soon.
OK, so what?
Well, it's one more reason -- as if we needed another -- to work on improving your credit score. Whether you have a few dings (or a lot of dings) or you've been pretty good, you should take a look at your score and your credit report every couple of years -- especially if you're planning a major purchase such as a house or car. Even if you're sure that your record is spotless, look anyway; errors and omissions are incredibly common, and you'll want to get those fixed before, say, applying for a mortgage.
Fortunately, fixing credit report errors is usually straightforward, if tedious. Here are the steps:
Get your reports. You can order free copies of your reports from each of the three major credit bureaus -- Equifax
(NYSE:EFX), Experian, and TransUnion -- by following this link. They'll likely all be slightly different, so you need to check all three for errors.
- Check for errors in the reports. These should be obvious. If in doubt, double- and triple-check before disputing.
- Inform the credit bureau AND the company that made the report of the error. Send them each a letter via certified mail (return receipt requested) explaining the error. Include a copy of the credit report with the mistaken item circled. Keep copies of everything -- along with notes of any telephone conversation you have about the error, and anything they send to you.
- If they don't remove the error despite your best efforts: You have the legal right to attach a letter of explanation to your credit file. Make sure you cover all three bureaus and the original creditor -- the creditor is legally obliged to include the explanation in all future reports to the bureaus.
- Get any missing good stuff put into your report. If you have nice clean histories with smaller creditors (like store credit cards) that are missing from a report, ask the bureau (nicely) to add the information to future reports. If they can verify the information, they'll generally add it, though they may charge you a small fee.
Unfortunately, fixing legitimate dings isn't so easy. You'll have to do it the hard way -- pay any debt that's still outstanding, catch up on payments, be perfect from here on out, and wait for time to pass. For more details on the best ways to approach that process, check out this article in the Fool's Credit Center. And remember -- no matter how bad your credit is, it can always be improved with time, attention, and good efforts going forward.
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