Your credit score has far-reaching effects beyond the amount you pay for your mortgage and credit card interest rates.
While people are usually aware that their credit score can effect the amount they pay for loans, they are often unaware of the other areas it impacts. In fact, a poor credit score can cost you well over $1 million during your lifetime.
Recently Congress has been looking into the insurance industry's use of credit scores to help determine rates. The industry defends this practice, stating that insurance scores based on credit ratings are an accurate predictor of risk. In the long run, this helps insurers better determine each person's risk profile and helps keep down insurance costs for everyone, the industry argues.
Editor's Picks
On the other side, consumer and civil rights groups believe credit scores don't reflect a person's responsibility in relation to insurance. They argue it is unfair that "consumers with spotless driving records can be penalized with higher premiums just because of their credit score." They also posit that using credit scores means that certain minority groups pay more for insurance, no matter how well they drive.
How They Size You Up
As the use of credit scores expands outside of the lending industry to help other businesses and organizations determine a variety of risks, the health of your credit becomes an even more important factor in your personal finances.
The first thing you need to understand is how your credit score is determined. General information is available from Fair Isaac, although the exact algorithm used to determine your credit score is a secret closely guarded by each credit agency. The general guidelines about how your credit score is compiled are broken down into five main categories, with the following percentage weight for each:
