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How Does Credit Affect Insurance?

May 29, 2008
Most people know that their credit history can help influence the decision if they get approved for a loan or not. Yet, some people do not realize that their credit score might decide what they will pay for their insurance. Some insurance companies will wait until after raising the rate to let their customers know that the price has increased.

This was the case for Michelle Cardin of Aliso Viejo, California. Her insurance company let her know that her premium was going to be increased by $511, based upon her most recent credit score. Ms. Cardin was quick to access her credit report from the internet and found out that her credit score had dropped from 678 to 570 in recent months.

This was the result of unpaid dental bills, since she had mistakenly let them go to collections. Regardless, the bills and collections had an effect on her credit and score - and ultimately on her insurance prices. Not only did she have to pay her dental bills, she ended up paying a higher amount on her insurance premium.

The average credit score is between 600 and 650. This is seen as being fair and anything over 700 is definitely good. Although many people fall in between 300 and 850 points, 900 would be outstanding but in the minority of credit reports. So why exactly is your credit score important to your insurance company to determine your rates?

Customers are rewarded with lower premiums, based upon their risk and if they are less likely to acquire any losses. The easiest way to decide this is by looking at the credit scores that are reported. This will show how responsible you with your credit. Your credit score has a direct effect on your insurance premiums. Companies will use your report to decide how big of a risk you are and where to set your premium.

A recent study shows that approximately 90% of the top 100 automotive insurance companies look at credit scores when deciding on new policies. This process includes taking a look at bankruptcies, collections against your account, any judgments and of course delinquencies. The companies will also take a look at your credit history and accounts you have, combined with the length and payments.

The study shows a link between people who do not pay their bills and those who usually file an insurance claim. Companies can use this credit information of low credit scores to place customers at a risk.

Now more than ever automotive insurance companies are using consumer credit scores when quoting their rates. It is expected that home insurance companies will be quick to follow this process. Although this is something decided at the state level and that means that where you live will depend on what information the companies can get. Maryland and California are two states that do now allow insurance scores to be based upon the credit score.

It is a good reminder to work on your credit and get the negative points removed from your credit report. If you plan on getting auto insurance and would like to get low rates, this will only be to your benefit. You will be classified as either being high-risk, average or preferred.

Here a few things you can do to try and prevent low credit scores. Make sure you are paying your bills on time and keep them updated monthly. Have your accounts in order with the number, balances, credit limit and the due date. If you pay your bill as soon as you get them you might be able to deduct up to 100 points per default. You should try and charge only 1/3 of your credit limit.

If you can, try to stay away from any unnecessary credit and not apply for any extra credit cards. Finally, keep an eye on your credit report and try to get a copy at least once a year.
About the Author
Christina Costa, a freelance credit repair writer, recommends Equotegrabber - where you can get a free credit repair anaylsis online in seconds!Visit Equotegrabber.com
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