Credit Scores and Insurance Rates

Did you know that your credit score affects your auto and home insurance rates? Nearly all major auto and home insurance companies now review your credit score when providing quotes. Let’s take a closer look at how your credit information is used and how it affects your insurance premium.

What is a credit score?

A credit score is a snapshot of your creditworthiness represented as a number. Credit information provided by a credit reporting agency is converted into scores based on various criteria which ranges from 300 to 850. In general, the higher the score, the more financial credibility you have.

How are credit scores used?

Most insurance companies use credit scores in the following two ways. First, as a reference to determine whether to approve or decline a quote. Second, as to determine the amount of your insurance rate. When calculating the rate, some companies put more importance on credits scores whereas some also review driving records and claim history.

What affects your credit score?

Below are the most common factors that impact credit scores.

Negative factors: bankruptcy, collection, mortgage, debt exemption

History of late payments: Number and frequency of past due payments.

Debt to credit ratio: How much debt do you have compared to your available credit?

Length of credit history

Homeownership: Whether a house is owned or leased

Credit inquiries: The number of applications for new accounts, such as recent housing loans, utility accounts or credit card

The number of credit cards issued: the number of major and co-branded credit cards that have been approved

The type of credits you are using: credit cards from major companies, store credit cards, finance company loans, etc.

Check your credit history!

There is a high possibility that an insurance company will check your credit score. Which means checking your credit score for its accuracy is important.  You can visit companies such as Equifax (www.equifax.com), Experian(www.experian.com), or Trans Union (www.transunion.com) and request a copy of your credit history.

In addition, if you contact the Federal Trade Commission (www.ftc.gov ) you can gain access to a  consumer brochure on credit reports. If you think an incorrect credit report has negatively affected your insurance rate, the insurance company should give the name of the National Credit Bureau that provided your credit report. You can request a copy of the credit report for free and dispute incorrect information.

How to maintain and/or improve credit score

First, it is most important to pay the debt on time without being late. Credit scores and records should be checked regularly and any issues that may negatively impact credit scores, should be dealt with. Negative information can last up to 7 years on credit reports, so it is important to steadily raise scores. It will require some time but, one to two years of consistent management will make a difference.