How Credit Scores Affect the Price of Credit and Insurance?


Have you anytime thought on what basis a lender grants you credit? No, you perhaps might not have thought about it. From times immemorial, credit scores have been used to check if a consumer is a good risk for home loans, credit cards auto loans and mortgages. However, nowadays even insurance companies and phone companies are using credit scoring system for taking a decision whether to issue a policy to you or not and if so, on what terms and conditions. If your credit score is higher you are at less risk to the company and hence the likeliness of you getting either a credit card, loan or insurance is increased and therefore you pay less for it as a premium or interest, etc.

To understand how credit scores influence the price of credit and insurance, the Federal Trade Commission (FTC), which is the nation’s consumer protection agency, helps you to clearly understand certain financial terms related to credit such as:

What is meant by credit score?

It is a 3 digit score that helps the creditors to decide whether to give you credit or not and it will also help in deciding the terms on which you will be offered a loan and the amount you will pay for it. The higher the score the, the lesser is the risk and hence less rate.

What are Credit scores and credit reports?

Your credit report is an essential part of your credit score. Therefore, it is essential you have an accurate credit report. Federal law gives all the consumers the right to get a free copy of their credit reports once in every 12 months from any of the three national credit reporting companies.

Similarly, the Fair Credit Reporting Act (FCRA) gives all its consumers the right to get their credit scores from the national credit reporting companies. They can charge a nominal fee for the consumer’s score.

How is a credit score determined?

A random sample of customers is selected by a creditor or insurance company, and that sample is analyzed statistically to identify characteristics that are related to risk. Each characteristic is then assigned a value based on the reliable prediction of who is a good risk. Every company can use its own scoring system, either a generic model or different scoring systems for different types of credit or insurance which are developed by a scoring firm.

How can you improve your credit score?

Credit scores are complex, and it varies with creditors or insurance companies for different types of credit or insurance. If a single factor change, the score automatically changes, but an improvement of the score mainly depends on how this particular factor relates to the others in that model.

Is a credit score reliable?

If they are properly designed, credit scoring models usually provide faster, accurate, and impartial decisions than we as individuals can make.

What should I do if my credit or insurance is denied, or if I don’t get it on my terms?

If your credit or insurance is denied, the ECOA states that the creditor should give the customer a notice with reasons for denying your application or the customer has the right to learn the reasons if asked within 60 days.

The Federal Trade Commission (FTC), the nation’s consumer protection agency, wants you to know how credit scoring works.

Updated: November 29, 2016 — 6:50 pm

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