If you have ever wondered how credit scores affect your insurance rates, now is the time to do a little research. Many people don’t even realize that credit plays a role in insurance rates, but it can mean the difference between being able to afford comprehensive coverage and just the legal minimum liability coverage. Here are some facts about how your credit rating impacts your insurance premiums.
Insurance is about Calculating Risk
Policy underwriters are paid to weigh risks versus reward when approving an insurance policy and setting rates. This means that individuals with high risk factors will pay higher rates for coverage. Insurance companies believe that people who are careless with their finances will also be careless when they drive. While you may not think this is true in your case, the assumption about risk factors and credit scores is generally pretty accurate.
Poor Credit Can Prevent You from Being Insured
A recent study showed that 92 percent of insurance carriers use credit ratings to determine if they will offer a policy to a person at all. This means that you could be prevented from getting insurance from a quality insurer, and may have to use an unreliable source for your coverage. If you have a poor credit rating and are looking to purchase insurance or switch carriers, it might be a good idea to work on your credit rating first.
What Credit Rating is Used?
There is more than one credit rating out there. Many people are familiar with the FICO credit scoring system, but insurance companies can also order a FICO insurance score. While these are calculated using similar methods, the numbers are slightly different. It is important to note that the insurance company won’t look at your actual credit report, which could be good or bad, depending on your situation. You may have a lot of medical debt instead of credit card debt. This could typically work in your favor, but the insurer won’t see this information. This is why it is important to maintain a good credit rating.
Your credit rating won’t just impact your rates or whether you get insurance at all. If you want to purchase a car, you may have difficulty finding a loan with poor credit. You will likely have to pay higher interest on your car loan plus higher insurance rates, which can make it increasingly difficult to afford a car. Same principle applies when buying a home too. Your mortgage application may not be approved if your credit rating is poor.
The best way to go about buying a car or a home as well as insurance for it is to repair your credit rating before you shop. Understanding how credit scores affect your insurance rates can help you prepare yourself when it is time to shop for a new policy.