Your Credit Rating Can Affect Your Premiums

What factors do you believe determine insurance rates? If your answer is: At-fault accidents, violations, where you live, property value, and what you drive, you’re right.

You’d also be right if you mentioned other factors such as age, experience, claims history, and prior insurance coverage. But here’s one you may not have guessed: Your credit history. And this is something – unlike age – that you can control.

The credit link

Research firms have found a link between bad credit and increased claim-filing. They also found that individuals with better credit have fewer traffic violations and accidents than those with bad credit.

After looking at data from roughly 1.4 million policies, the Federal Trade Commission (FTC) found insurers paid out almost twice as much for claims made by those with poor credit compared to people with higher scores.

The FTC said that credit scores are predictive of the number and cost of claims filed, and are effective at assessing risk and rates.

Good credit equals lower risk

Customers who pose less risk in all the factors used to calculate premium rates pay lower premiums. The corollary is that high-risk customers pay higher rates. The “credit” factor is similar to any other factor, such as make of car, at-fault accidents, your neighborhood, and your claims history. It will impact your rate.

While it’s unlikely you’ll start making financial decisions based on how they might affect your insurance premiums, it’s important to know how insurance companies establish premium rates.

What you can do

Understanding why credit affects rates can make you more aware of those things that affect your credit score – missed payments, high credit card debt, and even closing a credit card or an account. Controlling these factors can make a difference.

Make your good credit work for you. Not just when you apply for a mortgage, but also when you purchase insurance.