How Your Credit Score Impacts Your Insurance Premiums; Your credit score plays an important role in determining the insurance premiums you pay for auto, home, renters, and life insurance. Insurance companies view credit scores as an indicator of how financially responsible you are and how likely you are to file claims. Understanding how your credit score affects insurance rates can help you get the best premiums. This article explores the connection between credit scores and insurance premiums.
What is a Credit Score?
A credit score is a three-digit number usually between 300 and 850 that indicates your creditworthiness. It’s calculated based on your credit history including payment history, amounts owed, length of credit history, new credit, and credit mix. Higher scores indicate lower risk to lenders and insurers. The most commonly used credit scoring models are FICO from Fair Isaac Corporation and VantageScore.
Why Insurers Check Your Credit Score
Insurance companies rely on credit scores to predict the likelihood of claims being filed. Statistical studies by insurers have shown correlations between credit scores and insurance loss ratios. Consumers with lower credit scores tend to file more claims.
Insurers believe individuals who are more financially responsible in paying bills and managing debt are more likely to take better care of insured property and avoid mishaps. Considering credit scores allows insurers to assess risk levels and set fairer premium rates based on risk.
How Credit Score Impacts Auto Insurance Premiums
Of all insurance types, auto insurance premiums are most strongly linked to credit scores. According to the National Association of Insurance Commissioners (NAIC), drivers with poor credit pay as much as 68% more than those with excellent credit scores. Other estimates from insurance consumer organizations put the difference at 25-100% or more in some states.
Consumers with very good credit (scores above 780) enjoy the lowest auto insurance rates while those with poor credit (below 580) pay the most. Each insurer applies their own correlations between credit scores and projected loss ratios. Auto insurance premium algorithms also factor in other elements like driving history, location, and policy limits.
Homeowners and Renters Insurance
Credit scores are also factored into premiums for homeowners insurance and renters insurance though the impact is lower than auto insurance. Homeowners with higher credit scores may pay about 5-20% less than those with poor credit according to industry estimates. Renters with poor credit can expect to pay up to 25% more compared to renters with excellent scores.
Life Insurance
Life insurance companies also use credit-based insurance scores as a risk assessment measure when underwriting policies. However, the life insurance premium differences based on credit tend to be modest compared to property and casualty insurance. Applicants with poor credit may pay 10-15% higher life insurance premiums.
How to Improve Your Credit Score
Here are some tips for improving your credit score to get lower insurance premiums:
– Pay all bills on time including utilities and cell phone payments. Payment history has the biggest impact on credit scores.
– Avoid having credit card balances exceed 30% of the credit limit. Keep credit utilization low.
– Limit hard inquiries by only applying for credit when absolutely necessary. Too many inquiries can lower scores temporarily.
– Correct any errors in your credit report. Disputed negative items can get removed improving your score.
– Maintain a good mix of credit types including installment loans, credit cards, and mortgages.
– Increase credit history by retaining old credit card accounts and keeping positive payment records.
– Enroll in free credit monitoring to review your reports and scores regularly.
The Takeaway
Higher credit scores definitely translate to lower insurance premiums for most policy types. Maintaining excellent credit by responsibly managing debt, paying bills on time, and monitoring your credit reports can minimize how much you pay for insurance over the long-term. Compare rates periodically as your credit improves to enjoy possible discounts.
