March is National Credit Education Month—and many of us could use some help. When we think about credit scores, most of us are aware that our credit scores can affect loan approvals, car financing, credit card limits, or whether you are at the top of the list of tenants a landlord will consider.
Another area where credit score plays a critical role is in determining insurance rates. Your credit score, calculated from the information in your credit report, directly influences how much you pay for auto, homeowners, or renters insurance.
What Is the Connection Between Credit Scores and Insurance Rates?
Insurance companies are in business for profit and are concerned with managing risk. Each policyholder represents a unique set of probabilities. The goal is to assess the likelihood that you will file a claim, the potential payment for that claim, and your overall reliability as a customer. They use a combination of factors, including your credit score, to assess the risk.
They do this because studies have shown a correlation between claim behavior and credit scores. Insurers assert that individuals with lower credit scores are statistically more likely to file claims, and those claims tend to be costlier. Although this is not true for every person, data-backed trends provide insurance companies with the rationale for factoring credit scores into their calculations.
Insurers do not look at your raw credit score like a bank or lender might. Instead, they use a specialized “insurance score” that considers credit history but focuses on factors insurers believe are more predictive of your risks as a policyholder. Outstanding debts, late payments, and the length of your credit history could play a role in determining your insurance score.
What Impact Does Credit Score Have on Insurance Rates?
Your credit score could influence your rates for auto, homeowners, or renters insurance as follows:
- Higher score = lower rates: If your credit score is strong, insurers perceive you as financially responsible and less likely to file frequent or frivolous claims. Consequently, you are likely to have access to better insurance rates.
- Lower score = higher rates: On the flip side, a lower credit score may signal financial instability to insurers. They may require higher premiums to offset the perceived risk.
- Exception to the rule: In some states, insurance companies are restricted or prohibited from using credit scores to determine insurance rates. Your credit score may not affect your insurance premiums if you reside in one of these states.
How Can You Improve Your Insurance Rates?
If your credit score affects your insurance rates, taking the following steps can improve your credit score. While it will not happen overnight, these actions can make a significant difference over time:
- Pay bills on time: Payment history is one of the most significant factors affecting credit scores.
- Reduce credit card balances: A high ratio of balances to limits can negatively impact your score.
- Avoid opening new credit accounts: It can temporarily lower your score due to hard inquiries on your credit report.
- Check your credit report: Review the report for errors that could drag down your score unnecessarily.
- Meet with our experienced agent: We can work to get you the best available rates for the insurance coverage you need.
Review Your Insurance Rates
It’s always smart to review your insurance policies regularly and shop the market to see if you can save on your rates. Contact our agency today to speak with an experienced agent who can help you find the best coverage at the right price!