Hello fellow Dollar Stretchers.
Last time I gave you some information about Credit Bureau Reports. I also told you about an unpleasant situation one of my clients got into. This week I would like to go one step further concerning credit bureau reports and how they are affecting other consumers.
Recently a client began trying to finance a new mortgage loan on a home they had a lease with option to buy. Several years ago they had gotten into a little difficulty with payments only because they didn't make sure payments were made on time. It was not a lack of money but a lack of diligence on their part. They just hated to sit down on pay day and write checks. They put it off and put it off until past due notices came in, then it became necessary to pay the bill.
While trying to get a mortgage loan the credit bureau report indicated a lot of "I 2" and a couple of "I 3" ratings on their payment histories. The mortgage underwriting department required they submit a written explanation of what caused these slow payments. Needless to say they spent a lot of time writing explanations for why they were late. The bottom line was they didn't place much importance or promptness with their financial obligations.
A recent article in our local newspaper, "The Courier Journal", indicated some insurance companies were using credit bureau files to determine insurability. The article stated "More than ever, you need to check for errors in your consumer credit report. In traditional use your report is used to predict how promptly you'll pay your credit. But users are taking it far beyond this narrow sphere--employing it to pass judgment on your insurability, your fitness for a mortgage loan, even your character." I had never personally heard of this but was very familiar with the Credit Risk Rating Guide or Scoring System used by many financial lenders.
To explain the Credit Risk Rating system in an easy to understand term is pretty simple. Everything about your personal character and past payment history is given a point score. These points vary for each item. In other words you may get 10 points for owning or buying your home while you may only receive 4 points if you are renting. In addition, you may get 5 more points if you have lived there over 3 years, while you may get a -3 points if you have lived there 6 mos. or less. Everything can be considered (ex. Marital Status, Type of Job, Length of Employment, Amount of Income, and certainly past payment history).
The credit industry has used this system for many years. As a guide to whether you are credit worthy they will add up your individual points for each category. If your score is high enough you automatically get the loan. If you fall within the marginal score they will review it a little closer. Anything below a certain score and the credit is denied.
Now it appears insurance companies have the ability like creditors to secure a point score from the local credit reporting agency. I know of creditors that secure complete lists of names and addresses of individuals which fall above a certain score from the reporting agencies. Based on these scores they will solicit them to apply for credit. The insurance companies appear to be using the same source in obtaining a score on persons applying for mortgage insurance. A local State Farm Agent advised me they had stopped using this technique for mortgage loans due to some legal questions but they were still obtaining complete credit files on applications of car and life insurance. He further stated they did advise the applicant that a credit history would be obtained. This apparently kept them within the requirements of the Fair Credit Reporting Act.
The newspaper article went on to say " But scoring is moving in more controversial directions. Take mortgages, for example. Increasing numbers of mortgage lenders will be checking your score when deciding whether to give you a loan. Eventually, they will probably lower interest rates for borrowers with high credit scores and raise them for those with lower scores." You don't know your score. It's released only to people who inquire about you. The most commonly used system, created by Fair, Isaac & Co. in San Rafal, Calif, puts your number anywhere from 300 ("bounce the bum") to 800 ("Borrow money from us, please")."
Once my client wrote a detailed explanation for their transgressions on late payments, they finally got their loan. They secured the required mortgage insurance and paid the premium for one year in advance. The day of their loan closing everything went very smoothly. What happy individuals they were in their new home.
Three weeks later they opened their mailbox and got a surprise. The insurance company was notifying them they had 30 days to secure other insurance as the company was canceling them due to negative credit information they had obtained. Even though the mortgage underwriters had put them through a nightmare and finally agreed to accept them as a credit risk this had nothing to do with the insurance company.
Upset was not the word for this young couple. Now they were forced to apply for more insurance and admit on the application that they had recently been canceled. This could automatically force them into a higher risk rating which meant their premiums would increase substantially or they could get a flat rejection on the application. Failure to obtain insurance would automatically put them in default on their new mortgage loan simply because the contract required them to maintain full coverage during the term of the loan for the next 30 years. What if they couldn't afford the higher premiums? How could they pay the new house payment or worse the full balance of the loan, and their other bills along with insurance premiums much higher than they had budgeted for? I'm happy to say that eventually they did obtain a new policy which they could handle on their budget. It was higher than the original policy but they could manage.
The moral of this story, which is true, is your insurability may be just as much at risk as your ability to obtain a loan based on the information in your credit bureau file. Have you ordered your credit bureau file yet from the information supplied to you in last weeks Dollar Stretcher? What are you waiting for if you haven't already done it?
I would like to hear from other Dollar Stretchers out there if they have run into a similar situation with insurance. As far as I can determine at this time, insurance companies are just beginning to place a real emphasis on credit scores. There appears to be some concern in the minds of some insurance companies about their position under the Fair Credit Reporting Act since they are not actually lending money. Please drop me an email at "jmann@creditech.com" with any information on this subject you may have. However, I am sure we could see more and more of this in the near future.
Keep stretching those dollars.
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Jack is President of Creditech. Visit the Creditech web site for additional information on household budgeting.
http://www.creditech.com
email: jmann@creditech.com
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