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How Your Credit Score Affects Insurance Rates

Updated: Jan 4

Many of us grow up not thinking about our credit scores until we have to. Then, when we go to make an important purchase, we find that we may not qualify or have to pay much higher interest rates. Plus, we never really think about how our credit score is connected to insurance rates. How much do you know about your credit score? Do you know what the numbers mean? Let’s break it down:

Very poor credit: 300-579

Fair: 580-669

Good: 670-739

Very good: 740-799

Excellent: 800-850

Fair and poor credit numbers are a risk to banks and lenders, because it communicates that you do not have a strong history of repaying your debts. Thus, if they do decide to loan to you, they require the assurance of higher interest rates. When you see those zero interest car loans, it is important to remember that those loans are only available to those on the high end of the credit score spectrum. You may have heard of your FICO score. According to the Consumer Financial Protection Bureau, FICO stands for Fair Isaac Corporation, which helped to create a process for calculating credit scores.

The numbers are calculated by several things:

  • Your payment history (35%)

  • The amount that you owe (30%)

  • Length of your credit history (15%)

  • Your credit mix (10%)

  • And new credit (10%)

If you have not heard the term credit mix, this refers to the diversity of your credit portfolio. For instance, you may have car loans, education loans, credit cards, and a mortgage. With this robust credit mix, it demonstrates that you are good at managing a variety of different lines of credit. For every late payment to a credit card company or your car payment or your rent, that information gets entered and your number adjusts accordingly. This demonstrates how you can actually worsen or improve your credit score over time through your consistent actions. Good behavior improves credit with time and, eventually, bad years drop off. It takes 7 years for bad debt to leave and for your better credit output to change your score.

Now that we know more about credit scores, let’s explore how insurance enters into the mix. Of course, insurance companies are not directly lending you money. However, they do consider your credit score when calculating your rates. Essentially, 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.

Insurance rates are all about risk. For example, this is why it costs more to secure home and auto insurance policies in areas with extreme weather such as hurricanes, tornadoes, and floods. The out of pocket deductibles are high as well so that small claims cannot happen. Fire danger now impacts insurance rates in drought stricken states as well. All of nature’s power will cause insurance vulnerabilities to those that live in risky places.

The key is to manage your money wisely, make payments, and not overextend yourself. Then you will be able to secure good insurance policies at a reasonable cost and protect your assets. After all, if you do not have proper insurance and something happens to your vehicle, home, business, or health, you do not want to be forced to max out credit cards and live beyond your means. There may no longer be a debtor’s prison, but when you are in debt, you will still feel like you are in one. Start smart and compare insurance quotes with Insuravita today.

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