What does your postcode say about you?
Postcodes, in their current six-digit form, were first introduced in Norwich in 1959. And they have a practical function - allowing mail to be processed 20 times faster that would otherwise be possible, according to Royal Mail.
However, certain postcodes are increasingly being seen as prestigious, and people are often willing to pay over the odds for a property in the "right" postcode.
But the power of postcodes goes much further. Financial services institutions - mainly insurers - use them to help categorise your application for a financial product in terms of its cost to them. It's the first three digits (or first half) of a postcode that holds the key to your premium - and, just like the lottery, the numbers can either work for you or against you.
Postcodes are pivotal to insurers when calculating premiums for buildings insurance (which covers the structure of your home), as they are the main indicator for risks such as flooding or subsidence. Statistics built up over the years by insurers are used to place each postcode on the spectrum of risk.
As ratings become more sophisticated, premiums for some properties are being calculated using all six digits of the postcode, or even using the characteristics of an individual property. Back in 2002, for example, Norwich Union introduced a digital flood map that could be used to assess the flood risk of a particular property rather than a postcode area or street.
This is done using the elevation of the property, relative to sea level or river levels, rather than just its geographical location. Sally Leeman, spokesperson for the insurer, says: "This means that two properties on the same road with identical postcodes can have different premiums, because one is at the top of the hill rather than the bottom."
Don't be content with contents insurance
When it comes to contents insurance, postcodes are mainly used to assess an area in terms of the likelihood of burglary. However, it doesn't necessarily follow that a well-to-do postcode area will be cheap for insurance, says
Peter Gerrard, head of insurance research at moneysupermarket.com. "You may have a street full of executive six-bed homes. But as well as being secluded and often unoccupied, such houses are likely to have more valuable contents, and this increases the risk of burglary and puts up contents premiums," he explains. "Just up the street could be a block of affordable housing and, as they come under the same postcode, their less wealthy occupants will have to pay a similar premium."
Buildings and contents cover is typically offered as a single policy, called home insurance. West Norwood in Lambeth, south London, is the most expensive area for home insurance in the whole of the UK, thanks to an above-average risk of burglary, flooding and subsidence.
The lowest premiums in the area average £342.38 a year, according to research from moneysupermarket.com - but that's still 21% higher than the most expensive area outside London, the former cotton mill town of Bacup in Lancashire, where the lowest average quote is £288.58 a year.
London homes in general are the most expensive for home insurance, while Kincardineshire, East Anglia and Powys are among the cheapest.
Bring it on down
Short of moving home, there is nothing you can do about your postcode, and it's unlikely that insurers' will revise their criteria. However, there are other measures you can take to bring down the cost of your home insurance.
For example, check the cost of rebuilding your home, advises Gerrard. "Some people are still confused about this. A £200,000 home may only have a rebuild cost of £80,000, as it is the land, not the building materials, that's expensive."
Having a burglar alarm fitted that you use, installing double glazing, fitting a five-lever mortise lock on your front door and joining a Neighbourhood Watch scheme are all ways to help bring your contents premium down.
If your premium is still too high, you could ask a broker to look for insurers who assess their premiums on an individual basis rather than using block pricing, but be prepared for the premium to be just as high or higher.
"Consumers would also do well to shop around every year instead of automatically renewing with the same insurer," adds Gerrard.
Postcoding your pension
In August 2007, Legal & General launched a pilot that incorporated postcodes into the cost of annuities, which provide a pension income in retirement. Usually, non-profit pension annuities are determined by using the age and sex of individuals to assess their life expectancy, but, according to L&G, where a customer lives can also influence how long they are likely to live, so the postcode is still relevant.
Simon Gadd, director of Legal & General's annuities business, says the move is a natural evolution for the pension annuity market: "A customer's medical history and lifestyle-related factors such as smoking, obesity and high cholesterol are now used in the pricing of enhanced annuities (where your monthly payments are greater, due to a shorter life expectancy), and our extensive experience data indicates that postcodes are also a reliable rating factor. This means that we are able to more accurately assess, and so price, the longevity risk for each customer."
If this is true, then surely the same mantra should apply to life insurance? Kevin Carr, head of protection strategy at Lifesearch, says: "There has been a lot of talk about postcodes in recent years, and it is my gut feeling that they will eventually creep into the life and protection side of insurance.
"The question is: to what extent? However, while smoking can double your life insurance premium, moving from Moss Side to leafy Cheshire might bring down the monthly cost by just a few pence."
Getting the credit
There is much uncertainty as to whether your postcode or address affects your access to credit - where, for example, a previous occupant had defaulted on borrowing. However, while your postcode alone has never determined your credit score, it's true that, at one time, your address certainly would have - whether a default at your address was your doing or not.
Credit checks used to be run only on an address, but, following a tribunal initiated by the Data Protection Commissioner in 1993, this unfair system was ended in 2004.
"These days, lenders can only carry out credit checks with an individual's consent, and only on people, not addresses," says James Jones, consumer affairs manager at credit reference agency Experian. "When you apply for credit, the lender will only see credit information about you and anyone to whom you are financially linked, known as your 'financial associates'.
"Information about previous occupants of your home is not retrieved and can have absolutely no bearing on your creditworthiness."
While you can no longer be refused credit on the grounds of your address, you may be penalised in other ways.
"Postcode profiling is used by marketers to determine where to send direct mail offers, so you could miss out on an invitation to apply for a platinum credit card if you live in an area where low-income groups predominate," says Jones.
However, in the credit-on-tap culture we live in today, there are plenty of other channels for accessing credit, so this is hardly a problem. In any case, missing out on such an invitation is probably a blessing in disguise.
Your credit score is a three-digit number (ranging from a low of 300 to a high of 850) calculated from the information in your credit report. Your credit score enables lenders to determine how much of a credit risk you are. Basically, a low credit score indicates you present a higher risk of defaulting on your debt obligations than someone with a high score. If you have a low credit score, any products you successfully apply for will carry a higher rate of interest commensurate with this risk.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
Does exactly what it says on the tin: covers the contents of your home for theft and damage and also may insure certain possessions (jewellery, cycles) outside of the home. Things to watch for include the excess and also the maximum payout on individual items. Another grey area is kitchen fittings, as some contents policies say these are not contents but part of the fabric of the property and covered by buildings insurance and some buildings policies don’t cover them because they regard them as contents.
This type of insurance covers the structure and fabric of your property – the bricks and mortar, not the contents (for which you need contents or home insurance). If you have a mortgage, the lender will insist you have a suitable buildings insurance policy in place. Many lenders offer their own building insurance policies, but you don’t have to buy it from your own lender but you have the option of shopping around. The insurance covers you for the rebuilding costs, not the market value of the property.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.