How Good Credit Saves You Money on Insurance

Your credit has a direct impact on your insurance rates. Insurance companies take a close look at your credit before providing you with an insurance quote. It might surprise you to know that many businesses, not just lenders, are able to view your credit. While this may seem rather ludicrous, in the eyes of insurers your credit determines who you are and what you’re made of.

Over the past decade or so, insurers have determined that an individual’s credit history paints an accurate picture of the type of person that you are. How? Well, it’s all very simple once you understand where your insurers are coming from.

What your report says about you

When you apply for any kind of loan, lenders will often look at your credit report to determine the following things:

• How often you have applied for credit
• How you handle your credit
• What your overall report looks like

Based upon these ideals, lenders either accept your loan application or send you packing. Insurers are a lot like lenders, and look at your report for many of the same reasons. Not only do they want to understand your overall financial picture to make sure you can afford the insurance premiums, but they also want to see how you manage your credit.

Insurers believe managing your credit is comparable to the way that you will manage your insurance. While seemingly different beasts, there is a connection between the two after all. What is that connection? Take a look at the following reasoning behind insurance quotes and your credit.

Worse credit, more claims

Simply put, after doing some market research, insurers have found that people with low credit scores are more likely to make insurance claims. Likewise, people that make late payments frequently make lots of insurance claims. Is this comparison based upon fact? Can people really be judged by their credit scores?

The problem with insurance companies (well, one of the problems) is that they hardly every reveal their secrets. Although most insurers claim that there is a strong correlation between people with low credit scores and people that make too many insurance claims, there really isn’t any concrete evidence to support this finding—no evidence that the public has access to anyway.

What you can do

It is perfectly legal for an insurance company to take a peek at your credit when you request a quote. In fact, the fine print of the insurance application most likely includes a clause that the insurer will do so. You give your written consent when you sign the application. Therefore, you can’t stop an insurer from determining your worth based on your credit. What you can do is find out whether or not you are being judged from a credit perspective.

It is highly unlikely that any insurance company will tell you what, exactly, they do to determine your rate. They most likely incorporate your credit history, as well as other factors like your past insurance claims, your location, marital status, age and income into an "insurance score" designed to predict how likely you are to file a claim. For more information, ask any prospective insurer whether or not your credit plays a part when it comes to your rate quote. (The answer is most likely to be "yes.")

Additionally, you should obtain a copy of your credit report, and make sure that it’s up-to-date before applying for insurance. Ensure that you always gain the best insurance rates by maintaining stellar credit. While it may not be fair, you can bet that your insurers are more interested in your credit blemishes than you may think.