Can Credit Rating Affect your Insurance Premium?
Many people still think that credit scores only come into play when you apply for a car loan or a mortgage to buy a home. However, your credit history might be also the reason you are probably paying a higher insurance premium for your car or house insurance than your friend or neighbor living down the street for the same type of coverage.
Even though your credit rating has no effect on a person’s ability to drive or be a good and responsible homeowner, the harsh reality is that your credit rating score may affect the premiums you might end up paying for your home and car insurance premiums. Insurance companies set premiums for the insurance they sell, based on risk formulas they have developed and do not make public. Many companies are supposedly using their customer’s credit rating scores along with their own insurance risk criteria to set their insurance premiums for home and car insurance.
While there is no set rule that one can apply to determine how insurance companies measure risk, it is understandable that having a good credit rating makes one more stable and responsible type of a person.
Let’s take an example of two homeowners applying for home insurance. They may have the same type of house, live side by side and have no past insurance claims history. Even if they are insured by the same insurance company with identical coverage. Don’t be surprised if their premium rates differ for their home insurance.
The reason for different insurance premiums in the above example may be due to the difference in the credit scores of the two applicants. As credit ratings go, one person may have a better credit score than the other. People with lower credit scores may be considered by insurance underwriters to be more apt to make a claim than the homeowner with the higher credit score.
When companies do a credit check on you, they are given not only a score number but also details of your credit history. If you have missed payments on your credit cards then it would show up on your credit report. If you have defaulted on a loan payment, your credit history will show this. If you have missed making payments, you are not considered responsible enough when it comes to handling money. In other words you are a higher risk than your neighbor with a great credit score.
Having a higher credit score is considered by insurance underwriters a sign of stability and responsibility. Obviously, the higher the risk your insurance company considers you to be, the higher the insurance premium.
While some may be of the opinion that using credit scores to determine insurance premiums may discriminate against those who are in the lower economic group because they tend to usually get themselves in financial trouble and probably have a lower credit score. However, others may argue that regardless of your financial status you can still live within your means, pay your bills in time and maintain a good credit score and reap the benefits that come to those with good acceptable credit scores.
The importance of a good credit score in today’s world cannot be underestimated. Having a good credit history will save you money not only on your car loans and home mortgage but also on your insurance premiums.