Some Basics of Personal Finance: Insurance and Credit Scores

The topic of insurance isn't as exciting as other personal finance topics (such as investing) because it concerns an unlikely future loss. We are programmed to think more about immediate reward. Nonetheless, insurance is one of the critical areas of personal finance.

What is insurance for? Insurance protects you against financial losses. For example, you can take out home insurance policies covering against destruction or total loss due to fire, flood, or other natural disasters. If, by unfortunate occurrence, your home were damaged or destroyed due to one of these disasters, the insurance company would pay you a sum of money to cover your losses.

The insurance company will have you pay them (usually on a monthly basis) what they call premiums. You will also determine how much you want to pay if a disaster occurs. This is called the deductible. Although lower deductibles are enticing, the insurance company will have you pay higher monthly premiums if you choose this option. Remember that insurance companies are businesses that produce profits, so overall, they make money from their customers. What kind of insurance do I need? It makes sense to only purchase insurance policies for massive losses (such as cars and homeowners insurance). Taking out many smaller policies such as for phones and televisions is a losing game in the long run for the customer, so avoid this urge.

Another personal finance topic that isn't very fun to talk about (since it, too, offers no immediate reward) is the topic of credit scores. Credit scores are a numerical measure of your likeliness to pay back money. Folks who are interested in your credit score most commonly are lenders, credit card companies, landlords, and utility companies (who may waive a security deposit if your credit score is high). With a low credit score, you will be subject to higher interest rates, and unwillingness of landlords to rent to you.

To start building a credit score, it is wise to get a credit card early and make small purchases and consistently pay them off on time. The easiest way to maintain a high credit score is to pay every bill on time. Late payments are the single most destructive factor for a credit score. Using automatic bill pay will help guarantee this.

You are entitled to a free credit report each year, which can be found on the government-sponsored www.annualcreditreport.com (which provides a report only). To get the score from them, however, you will have to pay. Alternatively, you can go to www.transunion.com, get your free report from all 3 major bureaus and simply cancel before the trial period ends.

You can learn more about credit scores at this page.

Squiggle is the author of Finance Squiggle, a personal finance website dedicated to maximizing your net worth by bringing you advice based on essential scholarly research.