Credit Scores & Insurance: Give Yourself Credit
There are so many things in life that you have to deal with and worrying about your credit score probably is not one of them, but it should be. Sadly, your credit score will affect so many things in your life that you may not have even considered. The truth is that your credit score affects every dollar in your wallet and then some. What is your score? Well, it is a message to anyone who is going to do business with you in regards to lending or purchasing. It tells them what kind of risk you are. If you have a high credit score, then that shows you are someone who has managed their money well and pays on time. Therefore, the risk of them getting hurt in this financial venture with you is minimal.
If you have a low credit score or bad credit, it indicates that you are a credit risk and that you are likely to have a problem with sticking to the agreement and paying money back or paying on time. So, if a lender decides to trust you, because your past seems to show that it is a risk, they will ask more of you. They will ask for more up front and/or the interest rate will be higher, so that they feel they are mitigating the risk.
This can seem counterintuitive. When folks are struggling, this system makes it harder and more expensive to do business and live a nice life. It can seem so unfair and impossible to get ahead and right the course of their lives. When selling a car, if a buyer has a low credit score, the lender risks that you may fail to meet the terms of the agreement. If that happens, missed payments, repossession and other problems ensue. They look to mitigate this by charging a higher rate to loan the money and they may ask for more money down on the vehicle so the loss is less aggressive if you fail on the loan. These are all issues that are faced because your credit score or past financial history shows you in a negative light, saying that you fail to pay or pay late. This can show a lender that you are a poor risk based on your failure to manage debt to income ratio.
So how does insurance come into play? They are not loaning money, well, not directly anyway. Insurance companies use what is known as soft inquiry to help them set the rates. Essentially, your credit score is used to calculate your rate. They use information in your file to predict how likely you are to file a claim and what it will charge you for a policy with them. Insurance companies bet on the likelihood of you not filing a claim and, therefore, they look for patterns that will show them if they want to incur the risk.
That explains why insurance policies in risky areas of the country for hurricanes, tornadoes and earthquakes are more expensive. The additional riders for these specific natural events are even more expensive. The truth is that most of the insured population needs to not actually make claims on their policy in order for the insurance companies to have money to cover the claims that are made and still be profitable. If everyone needed to cash in on their insurance coverage all the time, there would be no money to cover those needs.
Managing your money wisely and not being over extended makes you a safe bet. And that helps you to secure lower rates and better deals when making purchases or getting an insurance policy.