Fix Credit Mistakes Before Applying for Insurance

Many Americans are well aware of the ways in which their credit standings will affect their finances one way or another. That little three-digit number can go a long way toward determining whether you'll get credit you apply for, and how much you pay for it. But what many may not know is that the details of their borrowing history can also be used to figure out whether they'll be able to obtain insurance as affordably as others.

A lot of different types of companies, even beyond banks and other lenders, will use your credit standing to determine whether you'll be able to qualify for coverage or services you might want. That includes cable TV and cell phone service providers, utility companies, and, yes, even insurance agencies. What this means is that if you are in need of a credit fix and apply for insurance coverage, it's possible that you won't be able to find the most affordable policies that might be available to other consumers, and some coverage providers may even deny your application altogether.

The reason for this is relatively simple: Just as a credit score was designed to tell lenders exactly how likely you are to be able to pay every one of your monthly bills for loans and other lines of credit, on time and in full, other companies that will charge you a monthly fee for service or coverage can extrapolate similar information from that rating as well.

The situation in Michigan
However, some lawmakers and consumer advocates say that this isn't necessarily fair to consumers. After all, people may be able to avoid relying on most types of credit in their everyday lives, but many may not be able to avoid needing insurance coverage. Between policies that will cover them for costs related to their healthcare, car, or homes, these obligations may be extremely vital, or even required by law. 

As a consequence, a state representative in Michigan's legislature recently introduced a bill that would prohibit insurance companies from using consumers' credit scores to set the rates they pay for any sort of coverage, according to a report from the non-profit Washington, D.C., public policy think tank the R Street Institute. This may serve to circumvent a 2010 decision by the Michigan Supreme Court, which overturned a 2004 proposal that would have discontinued insurers' ability to use consumers' credit scores to set discounts; at the time, it was believed that insurers in the state were increasing rates across the board so that they could give discounts to those with good credit specifically. That practice has since continued.

State Rep. Theresa Abed, who introduced the bill, noted she did so because it was potentially harmful to residents who had diminished standings, as well as potentially impacting young people who had not yet had time to build strong ratings, the report said. It could also be troublesome to older people who haven't had to rely on credit for some time.

"Seniors and other citizens should not be penalized and pay more for insurance because they are careful with their money and live without credit cards and own their homes or their car," said Rep. Abed, according to the organization. "People who pay their bills and don't spend more than their income should not be considered risky."

On the other hand
Of course, insurance companies generally use these ratings in the same way lenders do, and even if this bill were to pass, it would not affect any consumers in any other states. As a result, those living outside Michigan will need to do more to repair credit mistakes they've made in the past in a number of ways, to ensure that they're able to find the most affordable insurance coverage available to them.

The two easiest ways to do this, which can also serve to save borrowers money going forward, is to make sure to avoid any and all late payments, and simultaneously increase the value of monthly contributions made into outstanding balances, so that you can avoid any potential late payment fees and penalties, as well as face diminished monthly minimums at the end of every billing cycle. That, in turn, will increase the value your future payments even if you don't contribute more to paying down your debts, because whatever amount you pay above your minimums is contributed directly to your principal balance, rather than any interest charges you've racked up by carrying debt from one month to the next.

One great way to stay on top of your credit standing as thoroughly as possible is to ensure that you are ordering copies of your credit reports regularly over the course of the year. This will help you keep tabs on your progress, but also allow you to see whether any unfair markings are dragging down your ratings. If so, working with a credit repair law firm may help to quickly sort out the issues.