Your credit score should already be something you keep an eye on regularly. If you want to apply for an auto loan or get a loan to buy a house, you’ll want to have the best credit score possible in order to secure the lowest interest rates and payments. A low credit score may keep you from being approved for a loan entirely. But you should know that having a low credit score can also impact your insurance premiums too, though not exactly in the way you might think.
Credit History vs Credit Score
Your credit score doesn’t technically inform your insurance premiums, but your credit history, which affects your credit score, can have a direct impact on your insurance rates. That’s because insurers will take a look at your credit history in order to come up with the appropriate rates.
Think of it this way: if you have a lot of speeding tickets or you’ve been in a lot of car accidents, your auto insurance rates are bound to be higher. Similarly, if you’ve missed a lot of payments or you have a massive amount of debt, that will have a negative impact on your insurance premiums. Someone who has a long-standing credit history, a healthy mix of credit in good standing, and no late payments is far less of a risk than someone who can’t make their payments and keeps accruing more and more debt.
Insurers use your credit history combined with your insurance history to come up with a credit-based insurance (CBI) score, and that’s what determines your insurance premiums.
How Your Credit-Based Insurance Score Affects Different Types of Insurance
Here’s how your credit-based insurance score affects four different types of insurance:
Auto Insurance – Insurance premiums for your car can be significantly impacted by your credit-based insurance score. According to ValuePenguin, having poor credit raised rates by 61% compared to those with average credit. Meanwhile, having very good credit saved drivers more than 17% each year.
Homeowners Insurance – Insurers use credit-based insurance scores because there’s a correlation between a person’s insurance score and how likely that person is to file a homeowners insurance claim. For example, if you’re able to make your monthly mortgage payments on time, you’re more likely to maintain your home and be less of a risk to the insurer. So keeping your credit score up will help your CBI.
If your credit could be considered fair or good, you’ll still pay more than a third more on homeowners insurance premiums than someone who has excellent credit. Clearly that’s a big difference!
Health Insurance – Your health insurance isn’t impacted by your credit score quite as much as auto or homeowners insurance. But if you’re missing medical bill payments or you’re late paying your premiums, that has an impact on your credit score, which could hurt your credit-based insurance score and still become a problem elsewhere.
Life Insurance – Similar to health insurance, the life insurance sector isn’t all that concerned with your credit score. However, they’ll still check your credit history to see if you’ve had any major financial woes, such as bankruptcy.
How to Improve Your Credit-Based Insurance Score
Improving your credit score will help your credit-based insurance score immensely. Here are some tips to raise your credit score:
- Pay your bills on time! It’s an obvious tip, but it’s one of the most important things you can do to keep your credit score from dropping
- Keep your credit card balance low or non-existent, and try not to use credit cards too frequently. If you do, at the very least, make payments on time each month.
- Don’t open too many new lines of credit. Too much debt won’t look good in your credit history.
- Maintain a varied mix of credit and maintain that history by paying loans and credit cards on time.
- Did we mention making payments on time? It’s kind of a big deal!
We can’t stress enough how important it is to have a high credit score in order to give yourself a better credit-based insurance score. If insurers see that you’re good with your personal finances, they’re likely to give you lower insurance rates. Think of it as a reward for being fiscally responsible.