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Insurance premiums and your credit

By Dorothy Bunce

As a bankruptcy attorney, I know a lot of people with bad credit. Until recently, though, no one had ever brought up a problem involving the dirty little secret of the relationship between insurance premiums and credit scores. I received a call from one of my Chapter 13 clients who had been struggling to make payments in order to catch up on his past due mortgage payments through the Bankruptcy system. Unexpectedly, his mortgage payment had increased, by a lot!

I looked into this situation. No, his interest rate hadn’t gone up. His taxes had actually gone down, along with the value of his home. But for some reason, his real estate insurance premiums had tripled – going from $600 a year to over $1,8000 a year, even though in ten years he had never filed a claim.

That didn’t make any sense. I figured his premiums should have gone down since the value of his house had gone down drastically. To get an explanation, I called my trusted insurance agent. He explained that regardless of the current market value of real estate, property insurance covers the cost of replacing any property that is damaged. That cost has actually gone up. In addition, my insurance guy showed me why he is my trusted insurance guy. He explained that premiums for all kinds of insurance, from car insurance to property insurance and even medical insurance, are based on a person’s credit score. Two people with the same property or medical history, obtaining the same insurance, will pay vastly different rates if they have different credit scores. The person with the bad credit will pay a lot more for insurance coverage than someone with good credit.

Fortunately, my insurance guy was able to find a better deal for my client. But more and more I am discovering that many of the practices of insurance companies make no sense and in some instances sound somewhat shady. For example, if your car is damaged in an accident, does your insurance company tell the repairman to use original manufacturer’s parts? Or do they order the repairs to be made with “generic parts” that may or may not have the same quality as the car was made with? Maybe this doesn’t matter to you, but it seems to me that with all the fine print contained in our insurance policies, the policy ought to at least tell us what kind of coverage we are getting for our money. Should my insurance company be saying what kind of parts the repairman should use? Shouldn’t that be a decision for me to make?

For the amount of money we pay for insurance, I believe we ought to know what we are buying. I urge you to have a conversation with your insurance agent about what your coverage does and doesn’t provide. And certainly, for those who have young children, life insurance needs to be part of your estate plan. Term life insurance can be a very economical way to protect your family should the worse happen. Having a conversation with your insurance agent can also be a good way to find out if he or she is your “trusted insurance guy” as well.

For information about your credit score, you will want to check with the only legitimate provider or credit information to creditors, FICO. Other credit reporting services (like the ones with the catchy jingle on tv) are only guessing about your credit scores, as FICO owns a secret method of calculating credit scores. If you would like more information about repairing your credit, I would suggest that you review my many legal guides on Avvo, at www.avvo.com. There is no cost to access this important free information.