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One Late Payment Does Make A Difference

On May 5, 2014 by

A late payment on one account could cost you higher rates and fees on all of your accounts – from your credit cards to your auto insurance. More and more, companies are sifting through your credit reports looking for justification to increase your interest rates or say no to a higher credit limit.

Just one, single late payment or over-limit charge can have an adverse effect on all of your unrelated accounts. For instance, if you fall behind on your Home Depot bill, the interest rate on your VISA credit card could shoot up.

When lenders see someone become delinquent with another creditor, they see that as an indicator that the borrower is about to become delinquent with them.

Auto insurers are watching

Some auto insurers think that if you have bad credit, you’re probably a bad driver. They’re using credit data to help determine your insurance rates.

Ninety-two of the 100 largest personal auto insurance companies in the United States use credit data in underwriting new business, according to a study by Conning & Co., an insurance research and asset management firm.

It turns out there does appear to be a connection between your credit record and the likelihood of you filing an auto insurance claim. Drivers at the bottom of the credit heap file 40% more claims than drivers who are at the top, according to a study by the Insurance Information Institute.

Consequently, having blemishes on your credit report could really inflate your auto insurance rates. Consumers with poor credit can pay up to 50% more in auto insurance premiums than individuals with good credit.

What is an insurance score and why should you care?

Your auto insurance company doesn’t actually peek at your credit report. Instead, it receives an insurance score from a credit bureau based on the information in your credit record.

Like a credit score, an insurance score is based on information found in a consumer’s credit file. But the formulas used to arrive at the two types of scores are quite different.

An insurance score is going to be less concerned with your likelihood to take on new credit and more interested in how long you’ve been managing credit. If you’re curious to know your insurance score, you’re out of luck. Insurance companies aren’t required to tell you and often, they won’t.

Even if you could find out your insurance score, it might not be helpful. Yes, it could give you a sense of how a single auto insurer rates your credit record, but that’s it.

Bottom line: Your credit record does affect the cost of your auto insurance.

If you’re having credit problems, you should consider staying with your current auto insurance carrier until your record improves. If you must shop for a new auto policy, ask the insurer if they use credit data in their decision-making process. Not all companies do.

How to protect yourself

There are easy ways to reduce your chance of making a late payment and having your credit report tarnished:

  • Keep a list of all accounts, due dates, balances and credit limits and review it often
  • Get in the habit of paying bills as soon as they arrive
  • Monitor all accounts carefully
  • Check your credit report at least once a year and correct any errors

Eric Klein

Eric is the Principal Attorney and President of Klein Law Group. He has spent over 25 years practicing law and guiding clients through some of the most challenging times of their lives.