How your Credit Score Affects your Insurance Premium

When you come to take out auto or property insurance, or even renew existing policies, are you aware that your credit score is used as a factor in determining your premiums? It doesn’t have to be bad news as it could work in your favour, but you should be aware of the practice so you can ensure your credit score is in tip top condition with a high shiny number.

There are many factors which play a part in deciding if your custom is wanted or not by insurance companies, and credit scoring is the most controversial of them. Not all insurance companies do use them, and in some states the practice is not allowed. It is up to you as the consumer to ask if the company you approach uses them or not. If you aren’t happy with the practice you can then shop around for a company which does not judge your fiscal responsibility before setting your premium.

Insurance is all about risk management, and the insurance company wants you to take out their policies but they really don’t want you to make a claim, or how will they make any profit from you? So their ideal customer is one devoid of risk, a sensible, steady responsible person who maintains their house in pristine condition and drives their car in a steady reliable fashion.

Statistics prove that you will fit this ideal of the perfect customer if you also manage your finances in a responsible way. No one is certain quite how the correlation works but the fact that it is does, in the majority of cases, is enough to persuade the insurance companies to add it to their list of factors when they assess you. If you have no credit score at all you will not be denied insurance or charged more for it, you will simply be assessed on other key factors.

With property insurance the main things which are considered is the location and age of the property, any claims history, and the properties proximity to the nearest fire station or the amount of crime in the area. In addition to these considerations your credit score is factored in because your score indicates how responsible you are, and thus more likely to maintain the property in good fashion and make less claims.

With auto insurance the age of the driver and length of driving history weigh heavily, along with where you live, annual mileage and driving record. Amazingly though your driving record is of less consideration than your credit score as scoring is used for future risk rather than past history. Underwriters consider that bad drivers with good credit scores pose less risk claims wise than good drivers who don’t manage their finances in a responsible manner. The equation becomes the lower your credit score the more likely you are to file a claim on your insurance policy.

Insurance companies will look at your credit score once a year when it comes to renewing your policy and reassessing your premium. The arguments why scores matter seems more controversial with renewal, as you could have paid every premium on time, filed no claim, but be penalised with a higher premium simply because your credit score dropped in the interim.

Of course by maintaining a high credit score you will benefit by lower premiums which could equate to a hefty annual saving. The practice is likely to spread with your credit score being used in other ways, and the likelihood of things like level of education and type of job being used in the future too. You have the right to ask and be told if your credit score will be used as a factor, and if you disagree with the practice you can take your custom elsewhere.