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Bad credit? Insurers will make you pay

Your credit usage may be to blame for high home and auto premiums. Here's how to put yourself in a better light.

By Sarah Max, Money Magazine contributing writer

(Money Magazine) -- By now you know that you need to keep tabs on your credit history to make a good impression on lenders, landlords and employers. But did you know that your home and auto insurers are also looking?

In most states they're allowed to use your credit information to formulate premiums - and in June the U.S. Supreme Court decided that your carrier doesn't need to tell you if your credit has caused you to pay more.

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In concurrent cases against Geico and Safeco, the Justices unanimously agreed that the companies were not wrong in charging certain poor-credit customers more without notifying them.

The impact of the decision: "You are not going to know if your credit score is costing you," says Harvey Rosenfield, founder of the Foundation for Taxpayer and Consumer Rights.

How insurance premiums are determined is a recipe long kept secret from consumers. Some 90 percent of home and auto carriers use a score based on credit data as part of that recipe, according to risk-assessment firm Fair Isaac, known for its FICO credit score.

Some insurers buy this so-called credit-based insurance score from Fair Isaac or ChoicePoint, another data provider, or devise their own. One insurer may weigh the score heavily, another not so much.

Industry folks say they're simply using all relevant data. "Studies show that how people manage credit is a good predictor of insurance risk," says Claire Wilkinson of the Insurance Information Institute; in other words, insurers think that if you don't pay your bills, you're likely to file a lot of claims.

Whether that's true or not, your carrier will be peeking at your credit history. So you want to make sure it sees you in the best light (6 ways to kill your credit score).

Make sure insurers have the right info

No matter who devises the score, the original data comes from credit bureaus. So check your credit reports for accuracy.

Get a free copy from each of the three bureaus annually at annualcreditreport.com.

Tell them what they want to hear

Unlike traditional credit scores, insurance scores usually put more weight on prompt bill payment and slightly less on the type of credit you have, says Lamont Boyd, director of product management at Fair Isaac.

But if you follow the same rules for improving your credit score, your insurance credit score should rise as well. In order of importance, says Boyd, they are:

Pay bills on time: Late payments show up for seven years.

Keep revolving balances low: Insurance companies look at how much debt you have relative to available credit.

Keep your oldest credit card: Insurers like folks with well-established lines of credit. Five years is good, 10 ideal.

Don't apply for lots of credit at once: Your score might drop. (You're not penalized for shopping, however; multiple auto or mortgage inquiries within 45 days are considered as one.)

Get rid of miscellaneous cards you don't use: Having too many can hurt your score.

(How to ace your credit score)

Don't settle

So what if your car insurer decides that you no longer deserve that great rate? Thanks to the Supremes, you won't know why you've become such a poor risk or what to do to lower your premium.

Your best option: Shop for a new policy. You can try other companies, an independent agent or an insurance comparison Web site. Since insurers' weightings of your credit-based insurance score can be quite disparate, you're likely as not to find a company that thinks you are peachy.  Top of page