Have you ever wondered how a lender makes a decision to grant a loan? For many years, credit grantors have been using credit scoring systems to determine if you are a candidate with an acceptable level of credit risk to grant credit cards, loans for the purchase of automobiles. and mortgages. At present, there are other types of businesses – particularly car insurance companies and homeowners and telephone companies – that are using credit scores to decide whether they’ll issue a policy or grant a service, and on what terms. If you have a high credit score it will be considered that you represent a lower risk to the company, which in turn means that it is more likely that you’ll be granted credit or insurance – or that you pay less.
What Is the Credit Score?
The credit score or score is a system used by credit grantors that helps them determine whether or not they will extend a loan. This system can also be used to establish the terms that will be offered or the rate you’ll pay for the loan.
This system collects information from your credit report about your previous credit experiences, such as your bill payment history, the amount and type of accounts you have, if you are timely in the payment of your bills, the collection actions initiated against you, your outstanding debts and the age of your accounts. The amount of points earned – that is, the credit score – helps predict your repayment capacity, that is, the probability that you will pay a loan and meet the payments on the established dates.
Some insurance companies use information from credit reports and also combine it with other factors to predict the level of probability that you file an insurance claim and also to predict the amount of the claim.
Credit Scores and Credit Reports
Your credit report is a key element of many of the credit scoring systems. For this reason, it is essential that you verify that the information contained in your credit report is accurate. Federal law gives you the right to obtain a free copy of your credit reports every 12 months from each of the three credit reporting companies operating nationwide.
The Fair Credit Reporting Act also gives you the right to obtain your credit score from credit reporting companies that operate nationwide. These companies are authorized to charge you a reasonable fee for your score. When you buy your score, they also usually give you information on how to improve it.
Are Credit Scoring Systems Reliable?
Credit grantors or insurance companies can regularly assess many different characteristics of millions of applicants by applying credit scoring systems. But for the systems to be statistically valid, the sampling must be large enough. Typically, credit score systems vary between different businesses and companies that use them.
In general, when credit scoring systems are designed correctly, they allow decisions to be made more quickly, accurately and impartially than if a person did. In addition, some credit grantors design their own systems so that some of the applicants who get a score that isn’t high enough to pass the evaluation easily or get a score that isn’t low enough to fail the evaluation, they are referred to a credit manager who will decide if the company or lender will extend the requested credit. This can lead to a negotiation between the credit manager and the potential borrower.
The scoring models can be based on other information than what is on your credit report. For example, when you apply for a mortgage loan, among other things, the system may also consider the amount of the advance, the total amount of your debts and your income.
It is likely to take some time to improve your score significantly, but it is possible to do so. In order to improve your credit score in most systems -concentrate to pay your bills on time, cancel outstanding balances and avoid incurring new debts.
How Does A Bad Credit Score and A Credit Report Affect Your Insurance?
Your credit score and report aren’t a reflection of who you are as a person, but it certainly shows insurance companies the “statistical” chance of having an accident. It sounds ugly, but it is the truth.
Insurance companies consider that a person with a bad credit score has a 40% chance of having an accident, while those with high credit scores are less likely to experience a collision. It is also estimated that people with a poor credit rating pay 20% to 50% more for insurance than those with good credit. Which means that auto insurance companies use your credit scores to establish an initial payment and premium rates, or the amount of money you’ll have to pay for your vehicle each month. They will also use your credit report to evaluate patterns and payment habits, but the credit score weighs more when deciding what insurance rate to provide.
How to Improve Your Credit History?
Ok, we know what you’re thinking. How can I repair my score in the credit bureau? The answer is simple: paying all your services and loans on time.
Let us warn you that it will not be easy at all. The truth is that you can never fully repair a bad credit history, as it will remain permanently in your registry and will not disappear. It’s like a scar that still stings from time to time. The best thing to repair it is to pay your debts as soon as possible.
Keep in mind that, even if you have paid the debts in full, it is likely that you can still be rejected. For most banks and financial institutions, clearing the history and giving a “yes” takes two to three years to verify that you pay in a timely manner and can even reach up to seven years.
Fortunately, most insurance companies are more likely to forgive than banks. If your credit score is high and your credit report shows consistency in the payments of recent years, then you may be more open to reducing your insurance rates. The best you can do is ask and weigh your options. And do not be afraid to negotiate with them. Show them how you have struggled to pay off all your debts to maintain good credit. In this way, you’ll get the best possible car insurance rate while you enjoy your vehicle at the same time.