While a good credit score is well known for the advantages it has in the world of mortgages and credit cards, its impact on insurance rates is often lesser understood by those outside the industry. As experts in our industry, we can tell you your credit score definitely has an impact on your premium cost, though it’s only one of many factors.

Let’s review what goes into a credit score, why your insurance providers care, and what you can do to maintain a great score (and thereby a lower premium cost).

What is a credit score, anyway?

Let’s go back to basics for second — a credit score is a three-digit number that basically represents how likely you are to pay your credit debts/loans on time. The Fair Isaac Corporation, a.k.a FICO, is often who banks, lenders, and other companies turn to for that number so they can decide how responsible you seem to be. Their range of scores is between 300 (Very Poor) – 850(Excellent). The higher the number, the more adept and responsible you’re considered to be at making payments.

How does your credit score affect your insurance rate?

While you may not think of your insurance companies as lenders, in some ways they’re not too different. You’re paying a certain amount every month to be able to access larger amounts of money from them in the event that you need help (like damage to your car, property, etc.) that you wouldn’t be able to afford on your own. That’s why most insurance companies find it crucial to understand your previous credit history — they want to know that you’ll consistently make your monthly payments to them, so they’ll have the resources to help you and other customers in a pinch.

But even more importantly, insurance companies want to know how responsible of a person you are. They want to know how much of a risk you are to insure, i.e. how likely are you to file a claim and cost them money — and your credit score is a good indicator of that (but not the only one). The logic behind this is that if you’re a responsible (less risky) individual with a history of making payments on time, not borrowing more money than you can afford to pay back etc., then you’ll also be more responsible in other areas of your life.

With car insurance companies, that means they think you’ll be more likely to be a safe driver, follow the rules of the road, and take care of your vehicles. Home insurers will feel you’re more likely to take care of your house by making safe and smart decisions around its maintenance and about the kinds of activities you engage in (i.e. they’ll think you’re not the type of person to burn your house down by never cleaning your kitchen hood, etc.).

After your insurance company learns your credit score, they’ll combine it with many other factors (In the case of auto insurance, for example, other considerations include driving record, vehicle make and model, miles driven, and claims history, just to name a few.), and enter it into an algorithm they’ve designed to determine your insurance score. The better your insurance score, the less risky you are in their eyes — and the less you’ll have to pay on your premium.

Maintaining a good credit score

Now that we’ve broken down why your credit score is so important to your insurance company, let’s take a closer look at the factors considered when FICO determines your credit score.

Length of your credit history

How long have you had your bank accounts open, or how long have you been borrowing money on loans? The longer you’ve been borrowing, the more information FICO has to work with to make a more well-rounded assessment of your risk.

Multiple bank and credit accounts

The qualifier here is they need to be in good standing. If you have four open accounts but have lots of late or missed payments, it kind of defeats the benefit of having multiple accounts. According to Credit Karma:

“A new credit account could help your credit scores because it adds to your total available credit, which can lower your utilization rate. It may be easier to keep your utilization rate low if you have several credit cards and can spread out your purchases across those cards.”

Late/missed payments

Pretty self-explanatory, we think! Late or missed payments are never good when it comes to your credit score. It shows lenders that you can’t be trusted to repay their money to them in a timely fashion, which translates to you being a risky person to loan to. If you tend to be a forgetful person, start practicing the habit of paying off your bill as soon as you receive it. Or, to make life way easier, enroll in auto pay and never miss a payment again.

Low credit usage

This doesn’t mean not using your credit cards at all — it means not frequently borrowing a large amount of your limit. Everyone has a ceiling from which they can borrow money, the amounts varying. Make sure you’re aware of what your credit limit is so you can avoid “maxing” out. According to experts cited by CFPB, the ideal is staying 30% below your max.

For example, if your credit card limit is $5,000 and you frequently have about $3,500 in outstanding debt, that might be seen as you’re taking too long to pay off your debt.

Only applying for the credit you need

Credit scores often operate on a “use it or lose it” dynamic. In other words, if you apply for a credit card but rarely use it, this inactivity can wind up affecting your credit score in a negative way. That’s why you should only apply for credit that you need.

How to check your credit score

Monitoring your credit score today is much easier than in the past — it really just takes a few taps on your smartphone. There are dozens of easy to use, free credit score reporting websites online like CreditKarma, Experian, Equifax and TransUnion.

Just as getting in shape requires diet and exercise, there’s no such thing as a “magic pill” to obtaining and maintaining a solid credit score. It takes a disciplined approach to keeping tabs on what payments you have and ensuring that you don’t bite off more than you can chew. With these suggestions as your guide, you’ll find the “credit” where credit is due by saving money on your insurance coverage. Quote with us to find out how much money your credit score will save you on your car insurance.

This article is intended for informational purposes only. It does not replace or modify the information contained in your insurance policy, and may not reflect the official policies of Elephant Insurance or current developments.

Article last updated on June 25th, 2023 at 6:53 pm

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