A small thing like your credit score has a huge impact on your life. It influences many decisions like getting a mortgage, receiving a bank loan, buying a property etc. However, what you don’t know is that it also has an effect on how much you pay for insurance. The aim of this article is to help you understand how your credit score affects your insurance premium.
Credit Score Is…
So, if you are a financial novice this is a good place to start. What is a credit score? Well! A credit score is a numerical representation of how likely you are to repay the lender when you borrow money or take a loan. It is a number that reflects the borrower’s risk. The higher the credit score, the lower is the risk to the money lender and vice-versa.
How Is Credit Score Calculated?
No matter which bureau is calculating your credit score, they all take into account more or less, the same information. This information pertains to –
- Your payment history.
- How much loan or debt you have taken.
- Types of credit in your name including credit cards, mortgages, loans etc.
- Your credit limit and how much of it you have exhausted.
However, this calculation does not take into account –
- Marital status.
- Nationality etc.
Credit Score And Insurance Premiums
Now that you know what credit score is and how it is calculated, it is time to understand how it affects your insurance premiums. A person who has a bad credit score is most likely to file for a claim. Hence, for him or her, the insurance premium is bound to be high. While the reverse is true for a person with a good credit score. It is considered that a person who has a good credit score is less likely to file for a claim and hence, their insurance premiums are considerably lower.
In all this, the most important thing to remember is that –
If you do not give your consent to getting rated for a credit score, your premiums will be far worse than what they would ideally be if you permitted the credit scoring.
Credit Based Insurance Score
A credit score gives a peek into your financial viability in repaying a debt at the time the score was calculated. As against this, a credit-based insurance score gives an indication of how likely you are to file for a claim in the near future. While calculating credit-based insurance score only some and not all factors of your credit history are taken into consideration. Most insurers will use this insurance score along with your claims history report, motor vehicle report etc. while underwriting your risk. Your credit-based insurance score can be used as just one factor by the insurance company while underwriting risk. Your insurance premium cannot be based solely on your insurance score.
Information Used To Calculate Insurance Score
According to FICO (Fair Isaac Corporation), your insurance score is based on just 5 key factors. These include[i] –
- Payment history (35% of your scores) – timely payments on outstanding debts.
- Amounts owed (30% of your scores) – total credit or loans in your name.
- Length of credit (15% of your scores) – how long you have had the loan.
- New credit (10% of your scores)– how frequently you inquire about or apply for new loans.
- Credit mix (10% of your scores)– your mix of credit including mortgage loans, credit cards, retail accounts etc.
Can I have different Credit Scores?
Yes! Most definitely. With so many different ways and models to calculate credit scores, it is possible that your scoring may differ. It may also happen that the money lender is not reporting to all the bureaus or he may be reporting to them at different times, this too could result in varying scores. However, the difference is not going to be too much.
How To Improve Credit Scores?
The important question now is that of maintaining good credit scores. So, how can you do that? No matter what you think, maintaining good credit scores is relatively easy. All you have to do is–
- Pay your bills timely and in full. Do not make regular defaults. Turn on reminders when you are liable to forget.
- Do not exceed your limits no matter how hard pressed you are. It’s all about controlling your expenditures.
- Don’t open and close credit cards regularly. Cycling through each one will negatively affect your credit score.
- Lastly, if you can’t make the ends meet consult a credit counselor for guidance and assistance in planning your finances better.
What Is A Good Credit Score?
A credit score of 700 or above is a good score. Anything between 550 and 650 is poor and even less than that is really bad.
- Having a credit score of zero does not mean you have a really bad credit history. It just means that you may not have entered the rat race of purchasing on credit, taking a debt or loan. It may also mean that the lender has not forwarded your data or report to any credit rating bureau.
- Building a credit history is very easy. You just need to apply for a credit card and pay your bills.
- In the long run, having a credit history is more beneficial than not having one.
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