5 Facts About How Your Credit Score Affects Your Insurance Rates

We always hear about how important it is to maintain a good credit score, and everyone understands that a better score results in lower interest rates on loans. What’s less known is how your credit score affects your insurance and that your credit score also has a significant effect on your insurance rates. Here’s what you need to know:

1. Insurance Companies Generate Their Own Credit Scores

Unlike lenders, who simply access your credit score, insurance companies take one of the standard credit bureau scores and use their own proprietary formula to generate an insurance-related credit score for you. These formulas are complex, and they vary from one insurance company to the next.

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2. Lower Credit is Considered Higher Risk

Insurers are continually searching for new facts that can predict their customers’ behavior because the company’s earnings increase when its predictions are more accurate. During the 1990s, insurers became aware of the statistical probability that people with lower credit scores made more insurance claims. Insurance Analyst Laura Adams summarizes the correlation: “Maintaining a good credit history suggests that you’re a less risky customer.”

3. Great Credit Can Substantially Reduce Your Premiums

When you think about auto insurance prices, you probably assume they depend primarily on your driving record. In fact, your financial behavior (as reflected by your credit report) is a bigger factor than your driving behavior when it comes to setting your auto insurance rates. Consumer Reports gives state-by-state examples in which they show how poor credit can increase a driver’s annual premiums by as much as $2000. Homeowners also pay a premium: Insurance Journal reports that in 37 states, policy holders with poor credit pay at least twice as much for their homeowners insurance as do people with excellent credit.

4. Business Insurance Depends on Credit Scores

Businesses have credit scores that are partially based on their bill-paying track record and their responsible use of debt. These credit scores are used to set insurance rates for business insurance in the same way that individual insurance rates are set. One difference, however, is that your business credit score is also affected by the size of your company and the overall health of your industry.

5. It’s Helpful to Shop With A Broker Who Represents Multiple Carriers

Insurance carriers vary greatly in the way they use credit scores, and you’ll find big differences between them. Each insurance carrier is different, and while you may have never heard of one of the insurance carriers we partner with, chances are our team knows what may best fit your needs. Lawley’s personal insurance team specializes in helping people find the coverage that’s right for them. Contact us today if you’d like to learn more about the right coverage for your needs.