New Year’s Resolution – Review Your Credit Report

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New Years' ResolutionGetting 2014 started on a strong financial footing should include a review of your credit report. The government passed a law several years ago requiring each of the three nationwide consumer credit reporting companies – Equifax, Experian and TransUnion to give you a free credit report every 12 months. The reports can be requested on line at AnnualCreditReport.com or by writing to: Central Source LLC, P.O. Box 105283, Atlanta, GA 30348-5283.

Reviewing your credit report regularly is one of the best ways to protect against identity theft. Go through the report to make sure you recognize the accounts and loans verifying they all belong to you. Then check that the personal information on your credit report is correct. Any incorrect information or discrepancies should be reported to the account or the credit reporting company that issued the report.

The reports are free every 12 months and there are three credit reporting companies. A good strategy to stay on top of your credit is to request a report from a different company every four months. This strategy will keep you up-to-date on any credit changes and suspicious activity.

Part of your credit review should include checking your credit score. Several websites, such as Credit.com, CreditSesame.com and CreditKarma.com, already provide free credit scores. Discover, Barclaycard US and First Bankcard have signed up with Fair Isaac Corp., the company that developed the FICO score, to allow their cardholders to check their FICO scores every month at no cost. More credit card issuers are expected to offer their card members the same information shortly.

The importance of a good credit score cannot be overrated. A good credit score most obviously can benefit you when making major purchases requiring financing – buying a home, getting an auto loan, or setting up a business. However, landlords and some potential employers may also look at your credit history report or review your credit score. Phone service providers and cable companies may also review your credit history to determine if you’ll be a responsible customer.

Some people think credit scores are only important if you’re going to borrow money. However, insurance companies are also very interested in your credit score to the point they have developed an insurance score. Your insurance score is also calculated using data from your credit report and is used primarily by automobile and homeowner insurers. It helps insurance companies assess the risk of insuring a consumer by measuring the likelihood that a claim might be filed.

The fact that data in your credit report can affect your insurance rates may seem unusual. However, insurers have found credit information to be very predictive of future accidents or insurance claims and many insurers believe this helps them develop more accurate rates. The 15 largest auto insurers currently use these scores to measure insurability and price premiums. Insurance scores can affect your annual premiums as much as your driving record and the neighborhood where you live.

That’s because formulations for insurance scores weigh credit data differently from traditional lender scores. There are five parts to your credit score:

  • Amounts Owed = 30%
  • Length of Credit History = 15%
  • New Credit = 10%
  • Payment History = 35%
  • Types of Credit Used = 10%

Your insurance score takes into account these same factors but weights them differently. Then your past insurance history (accidents, claims, tickets) is added to the calculation to determine the final score. Some of the common adverse factors affecting insurance scores include:

  • Length of Credit History – Your oldest account was opened within the last 6 or so years and/or a significant percentage of your credit accounts were opened in the last 2 years, and need more established history.
  • Types of Credit Used – You need a more diverse mix of credit, that includes credit cards, loans, a mortgage, and more.
  • Payment History – Late payments of 30 days or more on one or more accounts can seriously damage your insurance score.

Whether you agree with it or not, insurance scores are here to stay. The studies correlating between credit scores and accident history are fairly strong. Talk to your insurance agent to better understand how your insurance score is determined, and how that information may be affecting your premiums.

Rick’s Tips:

  • Checking your credit report regularly is one of the best ways to detect identity theft.
  • Many credit card issuers are providing free credit scores to their customers and several websites already provide this information for free.
  • Credit scores can also impact insurance premiums. Even if you don’t plan to borrow money this year you should check you score to make sure it doesn’t hurt your premiums.

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