Having healthy credit, including a good credit score, can be a key factor in making major purchases, such as buying a car or a home. In fact, many businesses, including insurance companies, use credit scores as a barometer of financial responsibility. Good credit could save you money on your insurance premiums, whereas bad credit could mean you’re turned down for coverage.
How do insurance companies evaluate credit?
Insurance companies use credit reports to see if a customer pays their bills reliably, to determine what premium to charge and to predict future behavior. From an applicant’s credit history, the insurance company will establish their “insurance score” and then compare them to other clients with similar profiles. This helps companies anticipate what claims these clients may make and predict the potential cost of those claims.
A lower credit score might result in a customer having to pay higher insurance rates, while a higher credit score can help someone receive a lower rate. There are only three states, California, Hawaii and Massachusetts, where insurers can’t use credit scores as a factor in determining rates. This means that everywhere else, having a healthy credit score will keep your rates more affordable.
It’s also possible for credit scores to be so low that an applicant may be turned down by an insurance company. In these cases, the Fair Credit Reporting Act requires that the insurance company inform the applicant of why they were denied and where they can learn more about improving their credit. Consumers can also ask companies that have turned them down what factors affected the decision and what they can do to get approved if they apply again.
Even if you’re happy with your current coverage, speak to your insurance agent to see what effect an improved credit score might have on your premiums. You can also follow these simple tips to improve your credit score:
• Always make your credit card and bill payments on time.
• When you pay off a credit card, don’t close the account.
• Try to reduce the balance of any credit cards you have to below 30 percent of the card limit.
• Be consistent with your credit cards. Even if you don’t need to use credit, consider using a card for small but regular purchases, such gasoline or groceries, and pay it off each month to show creditors that you are reliable. This is also recommended to those building credit for the first time.