If you have ever borrowed money, you must know how the credit score works as an essential financial aspect for lenders to evaluate the potential borrower’s risk. But did you know that your credit score also impacts your insurance rates?
The insurance companies use your credit information to determine the risk level and decide your premiums accordingly. So a good credit score will eventually reduce insurance rates and save you from paying extra premiums.
However, many people are still unaware of how their credit score impacts their insurance rates and what they can do to improve it. To clear such doubts, we have curated this blog on Understanding the relationship between your credit score and insurance rates. So you can make informed financial decisions and save money in the long run.
What does your credit score have to do with insurance rates?
Many insurance companies use the consumer’s credit information to access the risk factor associated with automobile and homeowner insurance policies. It helps them set your insurance rates or decide whether to renew or issue policies or not.
Insurance companies believe that financial stability and losses have a direct connection. It implies if your credit statement reflects less costly loss, you are more financially responsible and should pay less for your insurance.
Companies generally take your credit report to generate a credit-based insurance score. It helps them to decide how risky you are for the insurance policy as per your creditworthiness.
However, every company uses different algorithms to generate your insurance score. If your score is lower, you are more likely to file a claim, and eventually, the company will set a higher insurance rate for you.
What is a credit-based insurance score?
Credit-based insurance scores help insurance companies to forecast the chances of you filing an insurance claim. Just like how credit scores help determine borrowing rates, a credit-based insurance score will likely help to assess the risk factor associated with insurance and formulate insurance rates and premiums.
Similar to credit scores, there are different types of credit-based insurance scores. Some insurance companies use these scoring models as a part of one of the attributes of risk management methodology.
Difference between credit score and credit-based insurance scores
Both credit scores and credit-based insurance scores rely on your credit report information. But they vary depending on three main aspects:
1. Purpose
A credit score helps lending institutions predict the likelihood of you repaying a loan on time. This way, they use credit scores to determine loan qualifications and interest rates.
Whereas, Insurance companies design Credit-based insurance to determine whether or not you will file an insurance claim in the future.
2. Basis of credit formulation
A credit score uses your personal information such as Gender, Age, Occupation, Race, Income, Marital Status, Religion, and Location of residence.
While credit-based insurance scores don’t use personal information, they use specific factors like the length of your credit and payment history, enabling them to evaluate your insurance risk level.
3. Consumer Access
You can easily access your credit score by requesting it online from a credit reporting agency.
Credit-based insurance scores are not accessible by consumers, only used by insurance companies.
What is a good credit score?
Different agencies use unique algorithms for calculating and categorizing credit scores, making it difficult to tell what a good score is.
So if a figure of 700 or above is good for one, others might consider 726 or above a good credit score. Here is the list of credit scores based on credit scores provided by the most reputed agencies in Australia.
|
Rating |
Equifax Credit Score | Experian Credit Score | Illion Credit Score |
|
Excellent |
833-1200 | 800-1000 | 800-1000 |
|
Very Good |
726-832 | 700-799 |
700-799 |
|
Average |
622-725 | 625-699 |
500-699 |
| Fair | 510-621 | 550-624 |
300-499 |
| Low | 0-509 | 0-549 |
0-299 |
How to improve your credit score to lower insurance rates?
Your credit score is a crucial element of your financial health. The higher the score, the better your chances of getting loan approval, insurance renewal and paying low insurance rates.
Here are a few ways to improve your credit score to lower insurance rates:
1. Ensure timely payment
Your payment history is a crucial aspect of your credit score, meaning maintaining a long history of timely payments will boost your credit score.
2. Bring your account current as early as possible.
If you have past due bills, try to bring them current soon. While it may not remove them from your credit report, it will restrict further late payments or fees and improve your credit score.
3. Bring down your credit utilization ratio:
The credit utilization ratio measures the available amount of credit with how much you use. If you have a high credit utilization ratio, try to pay out your debts to reduce the number. Eventually, it will improve your credit score.
4. Monitor your Credit Report
Regularly monitoring your credit report will help pinpoint any inaccuracies and remind you of your current credit score. This way, you can make changes to maintain a good credit score.
Conclusion
We hope all the points discussed in this blog helped you understand the relationship between your credit score and insurance rates. So save yourself from paying high premiums by maintaining a good credit ratio to negotiate lower insurance rates.