Your credit score hurts more than your credit

At a party this week, I was chatting with a friend. She relayed to me a story regarding her credit which serves as a good cautionary tale to all, the gist of which is this: your credit score can affect more than just your the rate on your cards.

You see, companies have figured out that FICO scores are good predictors of who will pay their bills on time. Insurance companies have started giving discounts to customers with higher scores on the notion that they will pay on time and are generally more responsible. Actuarial data tend to support this. Of course, we could easily look at it the other way: that insurance companies penalize those with lower scores by raising their premium.

Here is where my friend comes in who is not named Roxanne (sorry, Karl), but we'll call her Roxanne anyway. Roxanne recently bought two new cars- for cash. "Cash" in such a transaction, is not actual Benjamins, but rather a check. So Roxanne thought nothing of letting the dealership check her credit to be sure she wasn't a check scammer.

Now, it turns out that one of the variables that influences FICO scores is how frequent your score is being checked. The logic is such that if there are a lot of recent inquiries into your credit score, then you are probably seeking credit. One reason people seek credit is because funds suddenly became tight, hence the borrower is less credit worthy.

Thus my friend, Roxanne, suddenly found her home and auto insurance premium was hiked up. It turns out the inquiry dinged her credit score and the insurance company raised her premium as a consequence. If you knew Roxanne, you'd know that she is a friendly Fort Knox without a true need for credit in any circumstance. She only uses credit for transactions and has no debt at all.

Just like Roxanne, we may have no need for credit at all, but are merely facilitating a transaction. Or we might be smart by shopping around for the best deal. Unfortunately, Fair Isaac (the acronym "FICO" stands for "Fair Isaac & Co." - the company that actually computes and owns the FICO formula) has determined that those with deteriorating credit outnumber those with only benign and beneficial inquiries.

I've read that not just home and auto insurers are using the credit scoring tactic. Utilities in some places do it too and  I don't think anything is stopping health insurance or cable companies either. Yet it is all too easy to incur inquiries which might hurt you. For example, cell phone services usually check your score before signing a new 2-year contract and forking over the new $500 phone.

For better or worse, your credit score is part of your reputation and financial identity. Take some time to manage it accordingly. If you unwittingly let it get away from you, it may penalize you in other ways.

Link to previous how to check your credit score post.