Credit scores measure how capable you are of paying your bills, i.e. your financial health. Since any type of insurance depends on paying premiums, credit scores directly impact those services. An insurer will be prepared to offer you only those services that they are sure you can pay for.
How Does Your Credit Score Relate to Insurance
Credit scores are dependent on your credit history. Hence, they’re impacted by how well you’ve kept up with your payments and how much debt you’ve accrued. The latter directly impacts how able you are to pay specific bills every single month. This is why paying on time is one of the best ways to build your credit score.
Insurance agencies rely on a score, called the insurance score. These companies have perfected the art of figuring out the probability of losses and accidents. Health insurance, car insurance, home insurance, whatever it may be, they’ve designed formulas to predict losses.
A few companies may use stability ratings or micro ratings that combine credit ratings with the zip or postal codes. These scores factor in bulk data to ascertain how likely a loss is to occur within a region or an area. While this data analysis is very complex, it creates categories of customers that are more likely to cause the insurance company a loss.
Hence, this insurance score allows companies to offer coverage proportional to their risk.
How Does Your Credit Score Affect Car Insurance Rates?
Car insurance agencies try to ascertain the losses that you may cause them in the future. They factor in your history of unpaid parking tickets and/or speeding tickets as well as your driving record.
Other factors include the use of your car, driving record and claims history, as well as your personal information. Personal information is mainly used to market to specific demographics more than anything else. However, it can be used to determine your driving capability as well, and this will impact the coverage you get.
All that develops into a number they grade you with. Eventually, you’re given different options depending on how high that score is.
A study shows that individuals with poor credit scores pay up to 91% more in car insurance than those with an excellent credit score. Supplementing this is a survey from Consumer Reports about couples with poor credit paying $2090 more in auto premiums. Hence, if you have bad credit, not only you, but your spouse may also be affected. Other studies reporting similar findings have been carried out at the University of Texas Austin, and the Federal Trade Commission. Consumers marked as high risk pay higher premiums and vice versa.
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How Credit Scores Affect Mortgage Rates
Mortgage lending and home insurance are directly related to your credit rating. Lenders can even increase the cost of your mortgage with every risk attached to your credit profile. The lower the credit score gets, the higher the rate you will end up paying.
The difference between a 625 credit score and a 750 credit score could be 0.5 percent interest on your loan. Refinancing is also affected by bad credit scores. A good credit score will result in a great loan to value ratio. That means you’ll be able to get a loan of $190,000 on a $200,000 home if you decide to refinance.
Poor Credit History Affects Homeowner Insurance
Homeowner insurance comes at double the premiums for those with poor credit. Analysis by Quadrant Information Services showed those with fair credit paid 36% more than those with good credit in 2017. That is up from 32% in 2015 and 29% in 2014.
How Credit Scores Affect Health Insurance Rates
Health insurers aren’t as picky about credit scores as other insurance companies. If you’re covered by employer group plans, you’re more likely not to get affected by credit scores at all. However, if you’ve bought health insurance, you may be examined a little more closely.
The consensus is growing that financial health impacts wellbeing and longevity. Hence, insurers are looking at how regularly consumers can pay their bills on time. Contributing to that examination is the accumulation of data. Analysis through data warehousing will now allow insurance companies to examine health records. These will show the frequency of doctor visits and illness, which may further impact health insurance rates.
Credit Scores can Affect Life Insurance
Life insurance agents would have you live forever if they could. They want to be paid for as long as possible, so they pick people with the best financial health. Credit histories, after all, reveal the best money management.
Also, some studies have shown that those with better money management tend to live longer, healthier lives. So life insurance companies are tempted to sweeten your rate if you have a particularly good score.
How to Build and Maintain a Good Credit Score
There are a few things you need to do to maintain a good credit score. One of the easiest ways is to save for a purchase and then buy that object through a credit card. As soon as you’ve done that, you can pay off the entire purchase. This will show that you’re financially responsible and capable of paying big bills. This is ‘How to Build Credit with a Credit Card 101’.
Another great way to improve your credit score is to limit your spending, get rid of unused credit cards, etc. Living below your means and going for the essentials instead of going on a spending spree shows financial maturity.
Another way you can build a good credit history is by paying your bills on time. This instills the faith of banks, governments, and private companies in you. It can make your case for business loans, lower premiums, and better insurance rates.
Remember, your credit score will directly or indirectly impact a lot of the big purchases you make. Never let go of an opportunity to improve your score. It will help you in the long run.
Author bio: Emily Scott is a senior content manager at KikOff.com. She is responsible for overseeing the content writing services at the site. She enjoys bowling in her free time and loves the works of William Wordsworth. KikOff.com is a Fintech company that helps users build a great credit score for free.