How Your Credit Score Affects Insurance Rates

Your credit score does not just influence your ability to borrow money it can affect your access to auto insurance, homeowner's insurance, and renter's insurance and how much you pay for coverage.

For years the insurance industry has argued that consumers with bad credit are more likely than people with high credit scores to file claims. In addition, they discovered that people who made late payments were the ones who tended to have more claims. Therefore, understanding and maintaining good credit can save you money on insurance costs.

Credit-Based Insurance Scoring

Many insurance companies include credit-based insurance scoring as one of the factors they evaluate to predict the level of insurance risk you represent. Your insurance score is a snapshot of how safe or risky you are to insure. One factor used to figure out your insurance score is your credit score. Insurers also look at motor vehicle reports, your driving record, claims history, home condition or auto features, application data as well as well as other information.

The credit score the insurer uses is a little different from the credit score a potential lender uses. Insurance risk models are built to predict how likely you are to file an insurance claim. However, Both scores are similar in that they are based on your current credit report and are calculated using models built by Fair Isaac & Co.

How Insurance Scores are Used

Insurance scores are used to try to identify consumers who are consistent and reliable, as well as those who show a pattern of fanatical responsibly. Insurers say these people are less likely to file a claim on an insurance policy, therefore costing the insurance company less money. Insurers feel that utilizing credit information enables them to price their products more fairly. The better your credit score, the lower your premium.

How to Get the Best Rates

To get the most favorable terms on an auto loan you would need to have a credit score of a 720 or higher. It is possible to be eligible for an auto loan with a credit score of 500, but it will be extremely costly. With a 500 FICO score, you are looking at a loan at 19.1%. On the other hand, a 720 FICO score at today's rate could get you a loan at around 5.3%.

Monitor Your Credit

Checking your credit report is a first step to taking control of costly premiums. Insurers will periodically review your credit score when a policy is up for renewal, and they might change your rates or deny you coverage if you have bad credit. Improving your bad credit will result in a cost savings in insurance premiums.

Under the federal The Fair Credit Reporting Act (FCRA) you are entitle to a free copy of your credit report, from each of the nationwide consumer reporting companies - Equifax, Experian, and TransUnion, once every 12 months. Learn more with the Complete System to Repair Your Credit and Boost Your Credit Score. Download Today!