How Bad Credit Can Drive Up Insurance Rates

Man and woman looking through credit statements

 

It’s pretty common knowledge that people with great credit histories get better rates on home mortgages, auto loans, and other types of credit.  Here’s a fact that’s not as well known:  your credit history is also a big part of what makes up your insurance score. Your insurance score can have a major impact on how much you pay for auto and home insurance.

What is Insurance Scoring, Anyway?

Insurance companies calculate your insurance score based on info in your credit report. This is where it can get a little confusing: your insurance score and your credit score are not the same. Your credit score is a measure of your financial responsibility. Your insurance score is a measure of how likely you are to have an accident or file a claim.

Insurance scores are one of the things insurance companies consider when calculating auto insurance rates. The scores are used along with age, driving record, claim history and other factors to predict how likely you are to have a have a loss. Greater odds of a loss translate into higher rates.

Your driving record is one thing – but how does your credit history make you more or less likely to have an accident? Insurance companies say that risky credit behavior can be an indicator of risky behavior in other areas. (Think getting a lot of speeding tickets or not fixing a leaky roof.) Insurance scoring is used to price homeowners insurance, too.

While it’s often correct to assume that improving your credit score will help improve your insurance score, that’s not always case. Paying your bills on time can help because it shows responsible behavior. But some credit decisions can hurt your score. Opening multiple department store charge accounts or running up credit balances could increase your premium by hundreds of dollars.

Finding a Lower Premium

Each insurer has its own method of setting premiums. There’s no clear-cut way to find out which company is likely to give you the best deal. But there are some credit-related things you can do to improve your chances of getting a lower car insurance premium or home insurance premium:

  • Shop around. Premiums vary, so get quotes from at least three companies.
  • Pay your bills on time and check your credit report for errors at least once a year.
  • Avoid taking out retailer credit cards that are issued by a finance company.
  • Try to pay balances in full every month, or at least keep balances as low as possible.
  • If divorce, job loss or a death in the family have had an impact on your credit, ask the company if they will make an exception.

Don’t Give Up

Paying insurance premiums are a necessary part of protecting what you have. But it can be tough to pay out your hard-earned money to protect yourself from a loss that may never happen. Keep working to build an excellent credit record, drive safely and look at ways to lower your homeowners premium. Increasing deductibles or making improvements to get a discount are two ways you may be able to save. With some time and effort, you could end up paying less.