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Fix Your Credit -- And Your Car Insurance

Your credit scores help to determine what you pay for credit, loans and car insurance. Landlords check them. So do many employers.

But 96 percent of Americans don't even bother to review an annual credit report, according to a recent study, even when they can do so for free.

Even worse, the Federal Trade Commission report on credit showed that one in four consumers had errors on their credit reports that could affect credit scores. Five percent of consumers had errors that could lead them to pay more for their car insurance and financing.

Studies by federal and state regulators, universities, independent auditors and insurance companies show that your credit score not only predicts your likelihood of making a claim but also the potential cost of that claim, according to the Property Casualty Insurance Association of America. Drivers with a low credit score are more likely to get in an accident than someone with a high score. (See: " How car insurance companies set rates.")

According to credit analyst FICO, credit-based insurance scores are calculated using information on your credit report, such as how many times you've paid a bill more than 60 days late, to evaluate whether you are more or less likely to have a claim in the future. If you are less likely to have claims, then your premium may be lower. Note, however, that in California, Hawaii and Massachusetts, insurance companies are not allowed to use credit scores to set car insurance rates. (See: " Understanding state minimum car insurance requirements.")

Anthony Sprauve, spokesperson for FICO, says you should order free credit reports from the three credit reporting agencies (Experian, TransUnion and Equifax), but not all at the same time. This should be done through every four months over the course of a year rather than requesting all three at once in order to monitor your credit regularly.

"If you find a mistake, you should take steps to correct it at once," says Sprauve.

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