MONEY Insurance

Bad Credit Can Be Worse Than a DUI for Raising Auto Insurance Rates

Highway sign with DUI crossed out saying "You Can't Afford It"
Richard Klotz—Getty Images/iStockphoto

Insurers swear their rates make total sense.

Your credit score is a number that indicates how likely you are to pay off debts, from credit card bills to mortgages and beyond. The number is based on one’s credit history, and understandably, these scores are used regularly by banks and landlords as a way of determining whether it’s a good idea to give an individual a loan, or an apartment lease.

Increasingly, and somewhat puzzlingly, credit scores are also being consulted by employers to help them figure out who to hire, and by insurers that set premium rates based partially on the scores. Auto insurance companies began using the scores in the mid-1990s, and it’s now commonplace for them to help determine rates. Only California, Hawaii, and Massachusetts have laws banning the use of credit scores as a factor for establishing car insurance rates.

What in the world does one’s credit history have to do with the likelihood of, say, getting into a car accident? The web insurer esurance admits on its site that using credit scores to determine auto insurance is “controversial.” But it claims that doing so is legitimate nonetheless:

While the reasons why are less than crystal clear, research shows that credit scores can accurately predict accident potential. Statistical analysis shows that those with higher credit scores tend to get into fewer accidents and cost insurance companies less than their lower-scoring counterparts.

While insurers acknowledge that credit scores play a role in whether premium rates are high, low, or somewhere in between, it’s largely impossible to tell how big the impact is. That’s why Consumer Reports decided it was worthwhile to launch an investigation and try to get to the bottom of this. “Over the past 15 years, insurers have made pricing considerably more complicated and confusing,” the report states. Because insurers aren’t exactly forthcoming in explaining how they come up with rates (shocking!), Consumer Reports researchers analyzed more than two billion auto insurance price quotes from 700 companies for hypothetical drivers all over the country.

The results, published in the September 2015 issue, are particularly alarming for drivers with poor credit scores—and even for those with scores that are good rather than excellent. “Our single drivers who had merely good scores paid $68 to $526 more per year, on average, than similar drivers with the best scores, depending on the state they called home,” the report states. Nationwide, drivers with good scores paid an average of $214 more annually than their neighbors with the best credit scores.

The impact of one’s driving and credit history on insurance varies widely from state to state. In Florida, for instance, a single adult driver with a clean record pays $3,826 annually for auto insruance, on average, if he has poor credit, or $2,417 more than a driver with a clean record with excellent credit ($1,409). Meanwhile, a driver with merely good credit would pay $1,721 annually, or $312 more than his counterpart with a top credit score.

Astonishingly, at times a poor credit score seems to have a larger influence on auto insurance rates than a drunk-driving conviction—which, one would think, is surely a strong indicator of the likelihood of getting into car accidents. In Florida, a driver with excellent credit and a DUI would pay an average of $2,274 per year for auto insurance, or $1,552 more than the driver with a clean record but a bad credit score.

Apparently, in the eyes of some insurers, the failure to pay off credit card bills is a worse offense than drunk driving.

MONEY Credit Scores

The One Graph That Explains Why a Good FICO Score Matters for Homebuyers

young couple outside of home
Ann Marie Kurtz—Getty Images

An analysis from an economic policy group estimates that tight credit standards may have prevented 4 million consumers from getting mortgages since 2009.

When it comes to buying a home, there’s a lot more to the process than just finding an affordable home for sale and having enough money for a down payment. Most people need loans to finance such a large purchase, but even as the housing market has rebounded from the foreclosure crisis and low property values of 2010, mortgages remain very difficult to acquire. A report from the Urban Institute, a Washington-based economic-policy research group, concludes that 1.25 million more mortgages could have been made in 2013 on the basis of conservative lending standards practiced in 2001, years before the housing bubble began to inflate.

Whether or not a lender approves a borrower for a mortgage depends on several factors, like income and outstanding debt, but looking at the credit scores of mortgage borrowers during the last several years shows just how tight the market has been post-recession. Here’s how it breaks down.

Urban-Institute-FICO-Score-distribution

The Urban Institute estimates that the stringent credit score standards for mortgage origination resulted in 4 million mortgages that could have been made (but weren’t) between 2009 and 2013. From 2001 to 2013, consumers with a FICO credit score higher than 720 made up an increasingly large portion of borrowers, from 44% of loans in 2001 to 62% in 2013. Consumers with scores lower than 660 made up 11% of borrowers in 2013, but they represented 28% of home loans in 2001.

The study authors note that their calculations do not account for a potential decline in sales because consumers may not see homeownership as attractive as it had been before the crisis.

“Even so, it is inconceivable that a decline in demand could explain a 76% drop in borrowers with FICO scores below 660, but only a 9% drop in borrowers with scores above 720,” the report says.

On top of that, the authors found that tightened credit standards disproportionately affected Hispanic and African-American consumers. In comparison to loan originations made in 2001, new mortgages among white borrowers declined 31% by the 2009-2013 period, 38% for Hispanic borrowers and 50% for African-American borrowers. Loans to Asian families increased by 8%.

Millions of Americans are still feeling the impact of the economic downturn on their credit scores, because negative information like foreclosure, bankruptcy and collection accounts remain on credit reports for several years. Rebuilding the credit and assets necessary to buy a home takes time, particularly in such a tight lending climate, but by regularly checking your credit — which you can do for free on Credit.com — and focusing on things like keeping debt levels low and making loan payments on time, you can start making your way toward a better credit standing.

More from Credit.com

This article originally appeared on Credit.com.

MONEY Credit

5 Ways You’re Accidentally Wrecking Your Credit

pieces of credit card in hands
Roy Hsu—Getty Images

Certain actions, like closing a high-fee credit card, might seem financially savvy. But there could be consequences for your credit.

It’s one thing to knowingly make decisions that hurt your credit score. We’ve all been there, and sometimes tough decisions must be made. But it’s an entirely different situation to accidentally wreck your credit.

In some cases, we make decisions without realizing the impact on our credit. In other cases we may know that certain decisions can hurt our score, but we don’t appreciate the severity of the impact. Either way, maintaining good credit requires more than casual attention.

It is entirely possible that you could be accidentally wrecking your credit, and here are some of the ways that you could be doing just that.

1. Not Paying Attention to Your Credit Balances

Good credit is about more than just paying bills on time. About 30% of your credit score is based on your amount of debt, which includes your credit utilization. That’s the ratio of how much you owe on your credit lines divided by the total credit limit of those lines. For example, if you have total credit lines of $40,000, and you have a total outstanding balance of $10,000, your credit utilization ratio is 25% ($10,000 divided by $40,000).

If that ratio exceeds 30%, it can have a negative impact on your credit score. If you are casual about your credit balances, they can slowly creep up to 40%, 50%, 60% or more. At that point, you may see your credit scores begin to sink.

2. Closing Accounts

A lot of people make it a habit of closing out any credit cards that they pay off. From a credit perspective, however, this can have a negative impact. Though it seems counter-intuitive, a paid in full line of credit or credit card is a positive contributor to your credit score, even if you stopped using the account.

This brings us back to credit utilization. If you pay off a credit card that has a line of $5,000, that available credit is contributing to the total amount of credit you have available. That will improve your credit utilization ratio. Closing the card will lower your available credit, increase your overall credit utilization, and potentially lower your credit score.

3. Co-Signing Loans

Co-signing loans is another area where people are often very casual. They often assume that they are just doing a good deed to help a friend or family member, and may even mistakenly believe that it’s simply a one-time event.

But when you co-sign a loan, you will be involved in that loan and that loan will be on your credit report until it is fully paid. In the event that the primary borrower makes a late payment, this will have an impact on your credit score. Worse, should the loan go into default, this will also show up on your credit.

4. Applying for Too Many Lines of Credit

If you have good credit, it’s likely that you are getting bombarded with credit offers in the mail on a weekly basis. If you are in the habit of applying for the better ones every month or so, you could be unknowingly hurting your credit.

Credit inquiries account for 10% of your overall credit score. While this is the least significant factor, these hard pulls — as they are called — can ding your credit. Consider the impact these inquiries can have the next time you consider a 0% credit card offer or bonus miles sign-up deal.

5. Not Monitoring Your Credit Scores

One of the best ways to know if you are hurting your credit is by monitoring your credit scores. Credit scores change on at least a monthly basis, but typically stay within a tight range. A significant drop in your scores, say more than 25 or 30 points, is an indication that something is wrong. You won’t know about the drop, however, unless you are paying attention to your credit scores on a regular basis.

A significant drop in your score could be an indication that your credit utilization ratio is getting too high. It can also indicate an unsuspected late payment. Errors are also possible when it comes to credit. And at the extreme, a big drop in your credit score could be an indication that you are the victim of identity theft.

You won’t know any of these unless you are monitoring your credit scores on a regular basis. Unfortunately, ignorance is not bliss when it comes to your credit. You shouldn’t obsess about it, but at the same time, you should never be too casual about it, either. Bad things can happen when you’re not paying attention.

Fortunately, there are a number of ways to obtain and monitor your score for free, including through Credit.com.

More from Credit.com

This article originally appeared on Credit.com.

MONEY Credit

5 New Year’s Resolutions for Better Credit

best travel rewards credit card
Robert Hadfield

Start over in 2015 with these smart habits to improve your credit scores.

Improving your credit and debt situation in 2015 may not require drastic changes. In fact, simply developing a few good habits can go a long way toward putting you in a better place by this time next year. Here are five of them.

1. Ensure On-Time Payments

We all know paying our bills on time is important to maintaining good credit scores and avoiding late fees. But let’s face it: Sometimes we slip up despite our good intentions. It has happened to me: I once forgot to hit the “submit” button when making a credit card payment online, and another time I got a notice that I had missed a car payment I could have sworn I had paid online.

To make this a habit: Set up automatic payments so the money comes straight out of your checking or savings account on the due date. If you aren’t comfortable with that option, then at least set up alerts to notify you by text message or email when a payment is due.

2. Pay Back Debt With a Plan

If you’re carrying credit card debt, there’s a good chance that paying it off is one of the goals you are considering in 2015. If so, the most important thing you can do right now is to create a plan for becoming debt-free. Whether you decide to pay off the card with the smallest balance first or tackle the one with the highest interest rate first isn’t nearly as important as committing to a specific plan so you can track and measure your progress.

To make it a habit: Start with a credit card payoff calculator like this one to find out how much you’ll have to pay each month to pay off your debt within your targeted time frame. Commit to paying that much each month — without taking on new debt — until you are debt-free.

3. Use Credit Cards the Right Way

I’ve heard plenty of consumers call credit cards “evil” over the years, but if you use them the right way, you can save money and shop safely. That means only using them to make purchases you would have made if you paid in cash. It means spending what you can afford to repay before interest kicks in. And if you can’t do that (the car breaks down, you have an unexpected visit to the ER, etc.), you have a plan to pay off the balance in three years or less. It also means tracking your spending as it happens and reviewing your statements as they arrive for suspicious charges.

To make it a habit: Choose one card for everyday purchases. It should be a card with a grace period and no balance so that you avoid interest. (A rewards card is a good option for this purpose.) Keep track of your spending so you don’t spend more than you can afford to pay back when the bill comes due. Then, if you don’t already have one, compare low-rate credit card offers so you can get one to use as a backup when emergency purchases arise that you have to pay off over time.

4. Watch Your Balances

Even if you pay your balances in full each month, your credit score may suffer if the balances listed on your credit reports are high in comparison to your credit limits. Let’s say you pulled out one of your retail cards over the holidays because you earned an extra discount for those purchases. And let’s say your credit limit on that card is $500. If you charged $400, that’s 80% of your available credit. When that card issuer sent you the bill, it likely also reported your balance of $400 to the credit reporting agencies. The fact that you are going to pay it off won’t likely be reported until your next billing cycle closes — and the balance at that point in time is shared with the credit agencies. In the meantime your credit scores have most likely been negatively affected by that 80% debt usage ratio, which is considered very high.

To make it a habit: Keep track of your balances and try to keep your balance below 20% to 25% of the credit line (10% is even better). If you need to make larger purchases, consider making a payment online at least a few days before your billing cycle closes. If your issuer reports balances as of the “statement closing date” (many do), your reported balance will be lower and you won’t have to worry about your credit score dropping.You can track how your debt affects your credit by getting your credit scores for free on Credit.com.

5. Lower Your Rates

Interest rates have remained low through most of 2014, but many analysts expect them to start creeping up in 2015, so the more you can do now to lock in low rates, the better. If your credit scores have improved since you first financed your car, for example, you may be able to refinance your auto loan. Similarly, you may want to see whether you can get a lower rate on your mortgage. If your home used to be underwater, for example, but now you have equity, this may be a good time to refinance. Even credit card interest rates may be negotiated. But if you’re not successful when asking your issuer to cut you a break, you may be able to use a balance transfer or a consolidation loan to lock in a better deal.

To make it a habit: Mark your calendar for when you plan to review all your interest rates and shop for lower ones. Make it a yearly event. As Marc Eisenson, co-author of my book Reduce Debt, Reduce Stress likes to say, “Not asking is an automatic ‘no’.”

More from Credit.com

This article originally appeared on Credit.com.

TIME

5 Surefire Ways to Get Better Credit in 2015

You owe it to yourself to do these

Along with the New Year’s Resolutions about losing weight and learning a new language, plenty of Americans will be contemplating how to improve their credit in 2015.

Whether you’re trying to get a better credit score so you can qualify for a mortgage or a low rate on a car loan, are just starting to build your credit history or repairing it after a financial setback, experts say there are a handful of things you should be doing right now.

Consider a balance transfer. “January is the start of balance transfer season, [when] credit card issuers try to lure new customers with 0% APR promotional offers,” says Charles Tran, founder of the site CreditDonkey.com. While balance transfers can help people pay down a high debt load, you really need to read the fine print, Tran says. “Pay attention to the balance transfer fee and how long the promotional period is for,” he advises. Another thing you want to check is whether or not the promotional rate applies to new purchases or only to the balance you transferred onto the card. “Watch out, as a balance on the card will typically mean there is no grace period for purchases,” Tran warns.

Avoid applying for more. Applying for a credit card or loan dings your credit score just a bit, so if you’re planning a big purchase (say, a home or a car) where every point on your credit score counts, hold off on opening any other accounts for a while, says Odysseas Papadimitriou, founder and CEO of the sites CardHub.com and WalletHub.com. “Stop applying for other forms of credit at least six months in advance,” he advises.

Pay down any variable-rate debts. “It’s important to cut down your overall debt level as interest rates are predicted to rise,” Tran advises. Most credit cards these days are variable-rate cards with APRs linked to the prime rate, and right now the prime rate is unusually low. It literally has nowhere to go but up, which means more Americans will find themselves paying more to service their debts. For people who are already strapped, this could hurt their credit if they can’t make those higher monthly payments.

Check your credit reports. This is also especially important if you plan to buy a car or house this year, says Matt Schulz, senior industry analyst at the site CreditCards.com. “Check for errors such as accounts that you don’t recognize and late payments that you didn’t actually pay late,” he says. “Cleaning up any mistakes on your report can make a big difference to your credit score.”

Build a cash cushion. You might think your paycheck is already stretched thin, but experts say it’s important to sock away money in a savings account that you can access if you have an unexpected expense or interruption in your income stream. Without an emergency fund to tap, even a small shock to your finances could knock you into an expensive and long-lasting spiral of debt. “Do not get into additional debt without first having an emergency fund,” Papadimitriou warns.

TIME Money

Your Credit Score Reveals Way More Than You Realize

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teekid—Getty Images Credit Balance Report

Bad scores can be a sign of poor health

Never mind the blood pressure test: A new study finds that you can tell how healthy someone’s heart is just by looking at their credit score.

The study, published in Proceedings of the National Academy of Sciences, finds a correlation between high credit, cognitive ability and self-control. Researchers studied health and financial data from more than 1,000 people who had been monitored since birth for nearly 40 years. They discovered that your credit does a lot more than tell a bank whether or not it should give you a loan.

Employers, insurers and even landlords regularly pull the applicants’ credit already, treating it as a proxy for a vague sort of approximation of your diligence, honesty and character. Consumer groups have raised questions about the use of credit as a way to assess things like people’s ethics, arguing that the two aren’t necessarily related.

“Credit reports were not designed as an employment screening tool,” says nonprofit group Demos. “Employment credit checks are an illegitimate barrier to employment, often for the very job applicants who need work the most.” In a survey of job-seekers, Demos found that one in seven people with blemished credit said that they’d been denied a job as a result.

But scientists insist the link is real and they have the proof to back it up. “What it comes down to is that people who don’t take care of their money don’t take care of their health,” study leader Terrie Moffitt says in a statement.

At least some of the factors that influence both health and credit have deep psychological roots. Moffitt’s team found about 20% of the correlation between credit scores and cardiovascular health can be attributed to attitudes and behaviors that are either innate or ingrained very early — the attributes in question were all observed before the participants were 10 years old.

On one hand, it makes sense that someone who exercises poor impulse control when it comes to their diet or fitness regimen might be similarly lackadaisical about their finances, but this doesn’t mean that hard-wired personality traits doom you to poor health and poor credit. Social scientists say they hope the knowledge can lay the groundwork for people to make positive changes in their lives.

“It provides hope that early life intervention can impede the development of life-long patterns of illness and financial struggle,” says Lamar Pierce, an associate professor of organization and strategy at Washington University in St. Louis, who was not involved in the study.

MONEY Love and Money

3 Myths to Ignore About Marriage, Credit and Debt

Money contributing editor Farnoosh Torabi clears up some widely held misunderstandings about spouses' responsibility for debt.

MONEY Love + Money

5 Super Easy Online Tools that Can Help Couples Feel More Financially Secure

hearts made out of money
iStock

Can't seem to get on the same page with your partner when it comes to money? Help has arrived.

In order to achieve common goals, getting on the same financial page with your romantic partner is critical—but it’s also challenging.

As our own MONEY survey recently revealed, a majority of married couples (70%) argue about money. Financial spats are, in fact, more frequent than disagreements over chores, sex and what’s for dinner.

The Internet can offer some strategic intervention. From budgeting to paying off debt, saving to credit awareness, these five online financial tools can help everyone—and, in particular, couples—get a better handle on their money.

The best part: They’re free.

1. For help reaching a goal: SmartyPig

SmartyPig is an FDIC-insured online savings account that—besides paying a top-of-the-heap 1% interest rate—is designed to help consumers systematically save up for specific purchases using categorized accounts like “college savings,” “summer vacation” or “new car.” Couples can link their existing bank accounts to one shared SmartyPig account and open up as many goal-oriented funds as they desire. You see exactly where you stand in terms of reaching your goals, which can motivate you to keep saving.

Additionally, SmartyPig has a social sharing tool that lets customers invite friends and family to contribute to their savings missions. Don’t want people to bring gifts to your child’s next birthday? In lieu of toys, you can suggest a ‘contribution’ to his SmartyPig music-lessons fund and provide the link to where they can transfer money.

2. For help boosting your credit scores: Credit.com

If you and your partner need to improve one—or both—of your credit scores and seek clarity on how, Credit.com can help. The Web site offers a free credit report card that assigns letter grades to each of the main factors that make up your score: payment history, debt usage, credit age, account mix and credit inquiries.

A side-by-side comparison of each person’s credit report card can—even if the scores are roughly the same—actually reveal that one spouse scored, say, a D for account inquiries, while the other has a C- under debt usage. From there you can tell what, specifically, each person needs to improve upon. “It may lead to some friendly competition,” says Gerri Detweiler, Director of Consumer Education at Credit.com.

3. For help tracking your expenses: Level Money

Called the “Mint for Millennials,” Level Money is a cash-flow-management mobile app that automatically updates your credit, debt and banking transactions and gives a simple, real-time overview of your finances. It includes a “money meter” that shows how much you have left to spend for the remainder of the day, week and month.

A spokesperson tells me that couples with completely combined finances can share a Level Money account and see all bank and credit card accounts in one place. They can get insight into when either partner spends money and how that affects cash flow. The company says it’s continuing to build out tools for couples.

4. For help eliminating debt: ReadyForZero

If you and your partner need some nudging to get out of credit card debt once and for all, ReadyForZero may be of service. Launched three years ago, it’s an online financial tool that aims to help people pay off debt faster and protect their credit. The free membership gets you a personalized debt-reduction plan with suggested payments. The site tracks your progress so you can see how well—or how poorly—you’re doing and regularly posts “success stories” on its site to motivate users. You also get access to the ReadyForZero mobile app which sends you push notifications suggesting an extra payment towards your balance if you just placed a larger than normal deposit in savings or checking.

For couples, the tool can help one or both partners to stop living in denial and to come to terms with their financial obligations. Says CEO Rod Ebrahimi, “it demystifies the debt.”

5. For help syncing up generally: Cozi

When I asked attendees at the annual Financial Bloggers Conference last month about what sites, apps and online tools they like to use to keep their finances in check in their relationships, a few pointed to the website and app Cozi. It’s not a financial tool per se, but Cozi helps households stay organized, informed and in sync with master calendars and household to-do’s like food and meal planning, shopping and appointments.

Want to schedule a meeting to talk about holiday gifting and how much to spend? Put in in Cozi. Want to plan meals for the week so you’ll know exactly what to buy at the market and not be tempted to order in? Tap Cozi to make a list.

Ashley Barnett who runs the blog MoneyTalksCoaching.com says she and her husband have been using Cozi for years. “My favorite part is that the calendar syncs across all devices, so when I enter an event into the calendar, my husband will also have it on his,” she says. Cozi’s actually gone so far as helping the couple minimize childcare costs. “Before Cozi, if I accidentally booked a meeting on a night my husband was working late, I had to either pay a sitter or reschedule the client, which is unprofessional and hurts my business,” says Barnett. “Now when I pull up my calendar I see his work schedule as well. No more surprise sitters needed!”

[Editor’s Note: Cozi was recently acquired by Time Inc., the company that owns MONEY and TIME.]

Farnoosh Torabi is a contributing editor at Money Magazine and the author of the new book When She Makes More: 10 Rules for Breadwinning Women. She blogs at www.farnoosh.tv

MONEY Credit

WATCH: Credit Score Calculations Just Changed In Your Favor

FICO is decreasing the impact of medical debt on credit scores, which should make it easier for consumers to get loans.

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