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Life on your own often means paying your own way. For college students, how you manage your money significantly affects your credit, insurance rates and ultimately your future financial security.
According to Nellie Mae, a leading provider of student loans, 76 percent of all college freshmen will have at least one credit card when they start school. Many college students will use credit cards to pay for clothes, food, books, supplies and other necessities.
“Wise money management and prompt payment of bills are essential to maintaining both good credit and a favorable insurance score,” said Karl Newman, NW Insurance Council president. “Failing to manage your credit carefully will result in lower insurance scores and higher insurance premiums.”
But what does your credit history have to do with auto insurance? More than you might think. More than 90 percent of auto insurance companies in the U.S. use credit-based insurance scores.
Studies show a person’s credit history is the most accurate predictor of future insurance claims. In fact, a recent study released by the Texas Department of Insurance shows a strong correlation between credit and claims frequency.
The Texas study examined two million auto and homeowner policies. It revealed customers with lower credit-based insurance scores file claims more frequently than customers with higher insurance scores.
The study also demonstrates that policyholders with the lowest credit score file nearly twice as many claims as policyholders with the highest credit scores.
Some Key Facts About Insurance Scoring
An insurance score does not consider personal characteristics such as age, gender, income, net worth, home address or ethnicity.
Insurance scores do not discriminate against lower income groups. In fact, some of the best insurance scores appear among low- and moderate-income groups. It is evident that a low insurance score has nothing to do with income and everything to do with how people manage their money.
An insurance score is a numerical rating based on factors such as timely payment of bills, public notices, bankruptcies, tax liens and credit inquiries. Some insurance scoring models also include prior claim history.
Insurance scores are only one of many rating factors used to determine eligibility and rates. Other factors include age, driving record, vehicle, and mileage driven.
Insurance scores have proven to be a very accurate way to predict future claims. Separate studies conducted for insurance regulators and insurance companies have shown a very strong statistical correlation between low credit scores and frequent claims.
An insurance score will not be affected by inquiries from insurance companies.
Insurance scores do not include specific information about outstanding loans.
The Federal Fair Credit Reporting Act of 1970 (amended 2003) and Washington State’s 1993 Fair Credit Reporting Act allow insurance companies to use credit information when evaluating insurance coverage.
Using credit wisely is the best financial strategy for maintaining a healthy credit profile.
As you prepare for personal independence that comes with college life, it is important to manage your finances effectively so you can live a more prosperous and enjoyable life.
Through the Insurance Information Institute, NW Insurance Council offers free, downloadable personal finance software to help people better manage their financial portfolio. Visit http://www.nwinsurance.org to access My Financial House.
For a free brochure, Credit & Insurance, that includes information about how consumers can manage or improve their credit profiles, contact the NW Insurance Council at (800) 664-4942 or visit http://www.nwinsurance.org/in_credit.htm.
NW Insurance Council is a nonprofit, public-education organization funded by member insurance companies serving Washington, Oregon and Idaho.