July 9, 2019
Shawn Lane
Consumer Credit Expert
The benefits of good credit are seemingly endless. There’s the obvious — good credit can help you to qualify for loans, credit cards, and other types of financing. Solid credit can also help you pay lower interest rates when you’re approved. But low rates and high approval odds are only the tip of the iceberg.
Good credit can help you save money in many different areas of your life. In fact, the good credit you’ve worked hard to earn might even help you to score lower premiums on your auto and home owners insurance policies.
The savings could be significant. According to ConsumerReports.org, drivers with excellent credit in the state of Texas could possibly save $2,000 or more per year on their auto insurance premiums.
Same Concept, Different Credit Scores
Before we get into how good credit can help you to secure a lower auto or home owners insurance premium, it’s important to understand a little about how credit-based insurance score work. They may not be exactly what you expect when you hear the term “credit score.”
First, the scores that insurance providers use to predict risk aren’t the same credit scores that lenders use. For example, the guy at Nationwide isn’t going to be reviewing the same FICO Scores your mortgage loan officer looks at when you apply for a home loan.
Yet even though the credit scores may be different, they are still based upon the same information — your credit reports. As a result, good credit information will help your credit-based insurance scores and bad information will hurt them.
Late payments or collections, for example, are likely to damage your credit-based insurance scores. On the other hand, older accounts that have always been paid on time and credit cards with low utilization rates, are likely to give your credit-based insurance scores a boost.
Why Do Insurance Companies Want to Check Your Credit Score?
The purpose of a credit score is to help predict risk. In the lending world, lenders use credit scores to help predict (and hopefully reduce) the risk of loaning money to borrowers who won’t pay as agreed. Insurance companies, however, use credit-based insurance scores to predict the risk that a consumer is likely to file a claim.
Insurance companies care about the number of claims filed because it affects their profits. The fewer claims an insurance company has to pay out, the more profit it makes. Reducing the risk of claims is one way that insurance companies can improve their bottom line.
Many people dislike the idea of insurance companies using credit at all. Nonetheless, it works. There is clear data to back up the fact that people with higher credit scores statistically file fewer insurance claims. Whether insurance companies should use credit scores is a different argument.
How much emphasis do insurers put on your credit-based insurance scores when pricing your premiums? Your credit can actually be very influential. Believe it or not, your credit-based insurance score could be more influential over the price of your premium than even your driving record.
The Bottom Line
Unfortunately, whether you like it or not, insurance companies are going to continue to use credit-based insurance scores. They will likely continue to do so as long as the practice is legal because it saves them money.
But now that you’re armed with this information, you can use it to your advantage. Has your credit recently improved? If so, you may want to shop around for better-priced insurance premiums.
Does your credit need work? The prospect of saving money on your insurance premiums once your credit is improved can be some great motivation to propel you toward your goal.
Do you need help correcting errors on your credit reports? Contact Financial Renovation Solutions to schedule your free credit analysis today.