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Great 8 Tip #8 - What’s Credit Got to Do with Insurance?
Jeff Ryan - CLU, ChFC, AIA, CIC, CPCU
August 25, 2024
Once upon a time, what you paid for car insurance was exclusively determined by your:
- Age
- Driving Record
- Miles Driven and
- Vehicles Year, Make and Model
Though all those variables still play a role, other factors play an even bigger role in the development of your auto & in some cases homeowners insurance costs.
Today, an individual’s credit history can play a more significant role than any one of those traditional factors. Good Credit Scores lead to a Positive Insurance score. A good Insurance Score greatly influences what someone will pay to insure their vehicles.
What is the difference between a Credit Score and an Insurance Score?
- Credit Score: Is used by lenders to determine the likelihood that a borrower will repay a loan.
- Insurance Score: Is used by insurance companies to predict the likelihood of policyholder claims.
These “scores” consider factors like payment history, outstanding debt, length of credit history, types of credit used, and new credit inquiries. An Insurance Score, however, may weigh these factors with other variables that predict potential losses.
Still, one’s credit score will impact their insurance score significantly.
Carriers use an Insurance Score because it has been statistically shown to be a reliable indicator and predictor of risk. Essentially, those with a higher credit-based insurance score are statistically less like to file claim than those who have a lower score.".
Improving your credit-based Insurance Score involves many of the same steps as does improving your regular credit score. Those steps include:
- Paying Bills on Time:
- Why it's Important: The timeliness of paying off your credit is a major factor in determining your score.
- How to Improve: Set up reminders. Set up payments on automatic withdrawal.
- Reduce Outstanding Debt:
- Why it's Important: The amount of debt one carries relative to one's credit limit (called credit utilization) plays a critical role in your score
- How to Improve: Pay down credit card balances. Make a goal to keep your credit utilization rate at 30% or below your total available credit limit.
- Avoid New Credit Inquiries:
- Why it's Important: Applying for new credit cards or other forms of debt can lower your score as it suggests potential future financial stress.
- How to Improve: Only apply for credit when absolutely necessary.
- Maintain Long Credit History:
- Why it's Important: A longer, well-managed credit history will improve your score
- How to Improve: Keep the accounts you have had the longest and negotiate better terms as you manage your credit.
- Credit Type Mix:
- Why it's Important: Diversify the type of credit accounts you utilize. A balanced mix of Credit Cards, Installment Loans, and Mortgages can improve your score.
- How to Improve: It does not make sense to take out new credit accounts to diversify, because heavy dependence on credit cards for example, can hurt your score.
- Regularly Check Your Credit Report:
- Why it's Important: Errors on your credit report, or even fraudulent use of your credit can be a credit score killer. Maintaining a view of your credit can reveal open accounts that can be closed, and accounts that are no longer open that can be corrected.
- How to Improve: Obtain Free credit reports from the three major credit bureaus (Experian, Equifax, and TransUnion) and proactively close accounts and correct errors
- Consider Consolidation:
- Why it's Important: Some forms of debt may be better than others. For example, if you do not have a Mortgage but carry high balances on credit cards or revolving accounts, it might make sense to consider a Home Equity Loan
- How to Improve: Seek counsel on whether or not consolidating your debt makes sense
- Work with a Credit Repair Company
- Why it's Important: Managing and fixing your credit is only possible if you have the time and are willing to learn how to execute a plan. There are companies that specialize with this sometimes tedious and challenging process.
- How to Improve: Money.com has written an excellent article on the top-ranked Credit Repair companies. You can see that article and the companies they recommend here: https://money.com/best-credit-repair-companies/
Improving your score takes time and persistence. Applying discipline and a long-term perspective will result in improvements over time. Consistently applying good financial habits will result in positive impacts on your credit and insurance scores.
By utilizing the strategies above, you can reduce your insurance costs and improve your overall financial health.
About the Author: Jeff Ryan has been a licensed insurance agent since 1978, later becoming a full-time insurance professional in 1983. Since then, he has been the principal of The Ryan Agencies with offices in Hornell, Jasper, and Wellsville. The agencies serve approximately 15,000 clients in New York and Pennsylvania. Jeff holds numerous credentials including the Chartered Property & Casualty Underwriter (CPCU), Certified Insurance Counselor (CIC), Accredited Advisor in Insurance (AAI), Chartered Life Underwriter (CLU), and Chartered Financial Consultant (ChFC) designations. He holds a Master's Degree from the American College. Jeff enjoys writing about all things insurance and welcomes your questions and feedback.
This article may have been originally published at Quora.com.
To see Jeff's Quora.com profile click here.
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