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CHAPTER 9 EMERGENCY! FIXING YOUR CREDIT SCORE FAST 153 Even if you’ve had problems with an account, it might still be having a positive influence on your credit score. If it’s one of your older accounts, it could be helping to make your credit history look nice and long—remember, older is better when it comes to credit scoring. If it’s a revolving account, the credit limit is factored into your overall debt utilization ratio. If you close the account, you could make your existing balances look larger while making your credit history look younger than it is. From the Library of Melissa Wong This page intentionally left blank From the Library of Melissa Wong 10 Insurance and Your Credit Score Tawny had been a loyal Allstate customer for 15 years. The Texas woman had paid her premiums on time and had never gotten a ticket, had an acci-dent, or filed a claim. Then her auto insurance premium tripled: “I went through a devastating divorce where I lost my home and credit,” said Tawny, who became a single mother with three small children. “About a year later, I got a notice from Allstate that my auto insurance rate was increasing… I wasn’t too worried until I got my first bill. I went from paying $396 every six months to $1,200.” Kyra in Bridgeport, Connecticut, never had trouble with her auto insur-er. But when she tried applying for a renter’s insurance policy with MetLife, she was denied: “Although I have some previous credit problems, I would have never guessed in a million years that I would be denied a $200-per-year renter’s 155 From the Library of Melissa Wong 156 YOUR CREDIT SCORE insurance policy based on my credit history,” Kyra steamed. “I’m self-employed, educated, and a productive citizen. I’m not any more likely to file an insurance claim than an unemployed individual with a high credit score.” Glen in El Paso got a notice that his auto premium was being raised to $125 a month, from $85. After getting the runaround from his insurer, he dis-covered the reason wasn’t bad credit—it was too much credit: “My wife had opened a GAP department store credit card with a $500 limit, and used it,” Glen said. “Nothing more.” Glen was told by his insurer that consumers who use more than half their available credit on a department store card “are considered high risk and therefore must pay higher rates.” John in Negley, Ohio, was recently notified that his homeowner’s insur-ance premium would soar because of a recently filed bankruptcy. His only question for me: “Is this legal?” That’s typically one of the first questions many people have when informed that an insurer has raised their rates or denied them coverage based on their credit. Here’s the other question they understandably raise: What does my cred-it have to do with anything when it comes to insurance? “My circumstances forced me into bankruptcy… I’ve never had an acci-dent in my life,” said Chestena in Texas, who a year after her bankruptcy was quoted auto rates that were $400 to $2,000 higher than what she paid before she filed. “Poor credit does not mean that you are a risk or that you are prone to accidents.” Insurers, though, think otherwise. They believe credit is an excellent pre-dictor of whether you’ll file a claim—better, in fact, than almost any other factor, including your previous driving history. What’s more, using credit for insurance decisions is not only legal in most states, it’s also the norm. The vast majority of big U.S. auto insurers— 92 of the 100 largest companies—used credit information in 2001, according to a Conning & Co. survey, and so-called credit-based insurance scoring is widespread in the homeowners’ market, as well. Credit scoring has been slower to take hold in Canada, but a study by the Insurance Bureau of Canada’s Quebec office arm found an increasing num-ber of companies employing credit information in their decisions, according to the Insurance Journal. From the Library of Melissa Wong CHAPTER 10 INSURANCE AND YOUR CREDIT SCORE 157 The way insurers use credit information, however, can differ markedly from the way lenders use the same data. That’s why some people who have good credit scores and would qualify for the best rates and terms from most lenders still wind up paying higher premiums. History of Using Credit Scores to Price Insurance Premiums Insurers have actually been using credit information since at least 1970, when the Fair Credit Reporting Act first sanctioned the practice. Lamont Boyd, now a Fair Isaac executive, remembers his days reviewing credit reports as a young insurance underwriter in the 1970s. Boyd says his job was to look for “clearly ‘bad’ signals,” such as bank-ruptcies, foreclosures, or collections, which would be used as a reason to turn down the customer who was applying for insurance. The process, according to Boyd and Fair Isaac, was subjective and incon-sistent—much like the human-powered lending decisions being made in much of the credit industry at the time. People who might have been good risks, despite a few blemishes, were being turned down, whereas those who might have been worse risks were being accepted. Fair Isaac decided to tackle the insurance market in the late 1980s, short-ly after introducing the first credit scores based on credit bureau information. Although the company doesn’t dominate insurance scoring the way that it does credit scoring, Fair Isaac has been instrumental in promoting the idea that credit information can give insurers an edge in predicting losses. Fair Isaac introduced its first credit-based insurance score in 1991, and it hired actuarial consultants Tillinghast-Towers Perrin to review Fair Isaac’s in-house studies of the links between credit history and insurance losses. The correlations were so strong, said Tillinghast principle Wayne Holdredge, that the consultants were suspicious: “We went back to the companies [that supplied the insurance data] and made them sign affidavits, saying that they hadn’t cooked the books,” Holdredge remembered. “Now the correlation is well understood, but back then it wasn’t.” The cause of credit-based insurance scoring got another boost in 2000, when MetLife actuary James E. Monaghan published a study that matched 170,000 auto policies to the credit histories of the drivers. From the Library of Melissa Wong ... - tailieumienphi.vn
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