credit scores

You know you need a good credit score to buy a home.  You know you need a good score to purchase a car or take out a new credit card.

But at this stage of your life, you may have the home, the car, and all the credit cards you need.  That leads many to believe that their credit score no longer matters.

I’m here to tell you that that’s absolutely not true.  Even if you don’t think you’ll need another dollar of credit in your life – and I’d hesitate to assume that, since you never know what’s around the bend – your credit score heavily factors into another area that you’ll always need:  Home and auto insurance.

Here’s the deal: Auto and homeowners insurance companies (or property casualty insurers, as they are sometimes called) often use what’s called an insurance score to help them determine how risky a proposition you are—information that plays into how much you’ll pay in premiums and your eligibility for coverage (though it’s typically not the deciding factor). An insurance score, though, is different than the standard credit score that your credit card company or mortgage lender uses.  It is likely to put more weight on the length of your credit history, because what they’re really looking for is stability. They want to know that you’ve responsibly managed credit for a long time.

Right about now, you may be thinking: What the heck does my credit history have to do with my eligibility for car insurance?

It does seem kind of odd, but insurance companies have conducted study after study proving that customers with low credit scores file more insurance claims. They believe that your credit score is a better indicator of how much money you’ll cost them over time than even your driving record. And because insurance companies need to make money, they shy away from extending coverage to people who have filed a lot of claims in the past, or people who they believe will file a lot of claims in the future. (Or they simply charge these people significantly more for the coverage.)

Keep in mind, though, that this number represents only a portion of what goes into determining your eligibility for coverage and the amount you’ll pay for premiums. Companies combine the score with the other underwriting guidelines they use—your driving record with your state, or your claim history as a homeowner—to evaluate your risk.

As with your credit report, there are federal laws specifying when and how things drop off your report. Missed payments and public records will stay on your report for seven years, bankruptcy stays on for ten years, unpaid tax liens will remain for 15 years, and inquires into your file stay on the report for two years. Collection accounts will remain for seven years from the date that you initially missed the payment, and positive information can remain on your report indefinitely, although it generally drops off after seven years as well.