Credit Affects Your Insurance

Source: InsuranceUSA

The fact that credit history influences the chances of getting approved for a loan is common knowledge, but most people are unaware their credit score determines how much they pay for insurance. In many cases, insurance companies do not properly disclose these tactics and individuals are notified after their insurance rate has increased.

Take the example of Mathew Williams from New York. He was notified by his insurance company that his annual premium would be increased by $628 based on his recent credit score. Matt moved fast to check his credit report online and found his credit score had fallen from 680 to 540, a drastic decrease. He had recently been in a car accident and numerous unpaid medical bills were left on his credit. So not only did he eventually have to pay these medical bills, Matt was forced to pay the higher insurance premiums.

A credit score can range between 300 (lowest) and 850 (highest). Theoretically it can be 900 but that's rare. Credit scores ranging 600-650 are considered fair and over 700 is pretty good.

Why is an individual's credit score used by insurance companies to determine rates?

The insurance companies evaluate risk and then reward customers who are less likely to incur losses with lower premiums. The best way to do this is by using the credit scores reported by the credit unions to determine if the applicant is responsible. It is important to realize your credit score affects the cost of your insurance premiums. Insurance companies are looking at the credit report to measure insurance risk rather than credit-worthiness.

An insurance research firm found out that 92% of the top 100 auto insurance companies in the country use credit data when underwriting new policies. These factors which are considered by insurance companies that are relevant to calculating risk include, bankruptcies, judgments, collections and delinquencies. The different number and the types of credit accounts a customer has and the length of account history are also considered. Insurance companies say that credit scores are justified to correlate a low credit score with increased risk. According to studies, people who fail to pay their bills are more likely to file a claim.

Today, more than 90% percent of auto insurance companies nationwide use credit scores as a means of deciding rates. A large number of home insurance companies are slated to follow the same standard. Currently, California and Maryland are the only states that prohibit credit-based insurance scoring.

The laws and regulations that govern insurance are decided at the state level. This means that your place of residence actually determines what information companies gather and how they can use it, to assess insurance risk. It is important to be focused on removing the negative points from your credit report to increase chances of receiving lower insurance rates. Insurance Policyholders are classified as preferred, average or high-risk. This classification has a considerable impact on what rate an insurance company charges you.

Tips to avoid low credit scores

  • Keep an updated list of all accounts, due dates, balances and credit limits (automate your bill paying process).
  • Pay bills as soon as they arrive (as many as 100 points can be deducted per default).
  • Keep an eye on all accounts carefully (keep balances low and spend around 1/3rd of your credit limit).
  • Minimize credit card applications (avoid unnecessary credit).
  • Check your credit report at least once a year.Â