The insurance industry shouldn’t be cloaked in uncertainty and misunderstanding. One of the biggest questions I am asked is “Why is credit a factor in determining insurance rates?”. The confusion is completely understandable, and I want to clear it up for you.
Yes, your credit score is a factor because it shows a company a lot about you as a person. Things like how likely you are to pay back a loan, if you pay your bills on time and how you manage available credit. It is shown that people who are responsible for paying bills also obey speed limit and don’t run red lights or text and drive. Behavior matters and there is a correlation between how you handle your credit and insurance. For this reason, it has become industry standard that insurance companies weigh credit score when calculating risk.
Along with credit score we also look at your insurance score. Insurance score is made up of your driving record, length of time you have had insurance, any lapses in insurance and claims. So, your insurance score combined with your credit score are important when it comes to purchasing insurance and calculating premiums. About 20 years ago the Federal Trade Commission found that the credit-based insurance scores were good predictors of claims and the rest is history.
Even if you aren’t shopping for insurance your credit should always be monitored. Once every season you should look at your report and close out any old or unused accounts. Keeping balances at half of limit and pay on time are positive indicators on your report, as are different accounts. Your score will take a hit if all that you have is credit card debt. However, if you have a mortgage, auto and one or two credit cards that gives a more responsible picture.
At Martin + Martin we want to make the insurance process completely understood by you. If you have questions we will answer them. If you are confused, we want to clear it up so that you understand why and what you are covering. If you have a question give us a call and ask away!!