Your Credit Rating and Insurance Costs

Your credit rating and your insurance costs, like everyone else's, are becoming more closely linked as financial factors are becoming increasingly important indicators and standards in more areas of our lives. Although homeowners insurance costs vary across the country, it is mostly relatively inexpensive, especially considering the financial anguish that having it often spares the policyholder. However, it also is vulnerable to a poor credit rating.

When a person is purchasing a house, an apartment, or condominium either as a home or as an investment property that will be rented out, one of the most important aspects under review will be that person's ability to repay the mortgage. The mortgage broker will request a lot of financial documentation, including tax returns for a number of years, proof of employment, bank statements or other proof of financial health, and actual money as a down payment.

The broker or banker will also run a check on the applicant's credit status and a bad credit score could result in a denial of coverage. The goal is to find out as much as necessary about the applicant's history of repaying loans, or not that will assist the broker in making an informed decision about the chances that the applicant may default or conscientiously fulfil his or her financial obligations.

What a Credit Rating Means

Credit ratings are conducted by several different agencies, some recognized on a national scale. Financial institutions, employers, and charitable organizations use the credit report as an indicator of character as much as of financial responsibility. The rationale is that a responsible person, a person of character and integrity will be assiduous about repaying loans, and will also be very organized and will repay them always promptly, on time and in full.

In the credit rating system, a person is awarded points for paying on time, for paying in full each time, for never missing a payment or paying it late, and for owing money in the first place. Having an active credit, that is, being in debt earns a person a higher score, and up to a certain point, the more in debt a person is the higher the score will go.

Using the same criteria, a person is not merely denied points for making payments late, but actually gets points subtracted if payment is late even by a matter of one day. When a payment is late, typically fees and late charges are accessed and these all combine to further reduce a person's credit score.

Credit Scores and Premiums

Insurance carriers also use credit scores to determine what premium to charge prospective customers for policies that they might purchase. The credit score of the prospective homeowner will show the agent whether the applicant is financially responsible, and a high score will increase the homeowner's chance of receiving a reasonable discount on a premium.

The higher the risk that a prospective homeowner will default on an insurance premium payment, as indicated in the credit history, the higher the premium and deductible that will be quoted in the first place. The same relationship exists between the likelihood that the prospective homeowner will file a claim. If there appears to be financial instability in that person's records, and therefore possibly an intimation that a claim will likely be filed, the carrier will issue a quote for a high premium, to the prospective homeowner.

Moreover, there will be no arguments on which a discount might be negotiated. A person with a bad credit rating is generally not in a position to negotiate around an investment as substantial as a house. The insurance carrier will most likely not be open to negotiation.

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