You probably know that credit is a big part of your life as a consumer. This affects your ability to approve – and pounce on the most favorable terms and rates – car loans, a mortgage for personal loans, for everything from credit cards.
But do you know that credit also matters when you try to buy an insurance policy. Let’s find out why this is, and while shopping for insurance you can make sure that your credit score is in tip-top shape or not:
Why does credit matter with insurance?
First, the connection may not be clear that having good credit can help you secure an insurance policy. After all, you are not taking out a line of debt or debt. Why does credit matter?
Here’s the thing: When you’re taking out an auto or home owner insurance policy, insurers will take a look at your credit during the underwriting process.
This is because there is actually a link between you filing a claim and the possibility of insurance loss. In return, your credit score helps determine the cost of your policy.
What is a credit-based insurance score?
Your consumer credit scores, which are based on scoring models such as FICO and VantageScore, help you determine your credit. They are used during the insurance underwriting process. In other words, how likely is any payment missed.
There is another type of credit score that tells how much you are paying for insurance. And this is called a credit-based insurance score. While a credit-based insurance score draws largely from your consumer credit report, it is specifically designed for insurance companies.
Both your consumer credit score and credit-based insurance score affect your insurance premium.
Credit-based insurance scores and reports are created by companies such as FICO and Nexis Lexis. They help insurers determine how risky you can be as a customer, which in turn can impact whether they approve your application for insurance. Your insurance-based credit score also plays a role in determining the cost of your premium.
What is a credit-based insurance score?
Let’s take a quick look at what a credit-based insurance score actually is. Like a regular consumer credit score, Credit-based insurance scores can be divided into five parts:
Payment History. 40%. This makes a good part of your credit score
outstanding debt. 30% of your score is determined by how much debt you currently have
Length of credit history. 15%.
New credit 10% If you have applied for a new type of credit, any link on your credit file can affect your score.
Credit Mix 5%. You have different types of credits
What other factors affect your credit score?
An insurance company also cannot cancel, cancel, or renew your policy based solely on your credit score. And your credit score is not the only factor insurers take into account when deciding how much your policy will cost. Other factors that affect your auto or homeowners insurance costs include:
A detailed list is not here, and what may affect the cost of your insurance premium:
Features of your home or car: For homeowners and auto insurance, you are trying to insure the make, model and year of your car, which can affect the cost of your premium.
For homeowners insurance, features such as the type of roof you have, how big your home is, whether you have a home-based business, can affect the cost of your premium.
Your driving record. A clean record will help reduce your car insurance premium.
age gender. While race and ethnicity are not used when determining your premium, underwriters can look at your age and gender when it comes to auto insurance.
Where do you live For both homeowners and car insurance, your zip code can affect the cost of your premium.
Types of coverage. The amount of coverage, in addition to what is actually covered, your deductions may either increase or decrease what you are paying out of pocket.
Lapse coverage with any other insurance company. If you were late or missed on your insurance policy, and were removed from the policy in return, it could increase your premium when you shop for another policy with another company.
To avoid paying late or missing altogether, you can cancel your policy by tapping into the cover’s credit facility.
If you are signed up with a covered concierge and have a progressive policy, you are eligible for 50% of your premium, up to $ 100, to cover your premium.
Are credit-based insurance scores ethical?
There is indeed some debate as to whether the use of credit-based insurance scores is appropriate to approve an application and determine rates.
Some consumer advocacy groups feel this is unfair, partly because many consumers do not understand how credit-based insurance scores work. And other groups find that the use of credit-based insurance scores negatively affects low-income and minority groups.
As mentioned, the cost of your premium is usually not fully determined on your credit score. As insurance laws vary by state, some states prevent credit scores from being the only factor used in insurance premiums.
Some states use credit-based insurance scores only for auto and homeowners insurance, while others allow them to be used on other types of insurance. And a handful of states require that if credit plays a role in denying, canceling, or renewing your policy, then you need to give a heads-up.
Tips to maintain a strong credit score
Since a credit-based insurance score draws largely from the same data as your regular credit score, and the categories are the same, you can maintain a solid score by doing the following:
- Monitor your credit and see what the financial behavior may be in your behavior.
- Ordering a credit report to review any errors, and to get an idea of where you stand credit-wise.
- Staying on top of your rent, bills, debt and credit card payments
- Keeping a low balance in relation to your total credit limit on all your cards
- Keep credit line open
- Having different types of loans
Although credit is not the only factor that determines your premium rates, knowing how it affects your ability to get approved for your policy can help you build stronger credit and avoid costly mistakes.