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Monday, January 19, 2009

How credit score affects the insurance premiums you pay

Does your Credit Rating Affect the Insurance Premium you pay?

Indeed, it is a harsh truth that till date we lack adequate knowledge on the basic key factors associated with the term “credit” and the immediate as well as long-term impacts of credit score and credit report on different spheres of our personal finance including the insurance policies. There are people who still think that high or low credit scores have any impact only in increasing or reducing the chances of getting any more fresh loans for either buying any commodity or a brand new car or your dream home. It is possible that your credit history is the key reason you are probably paying a higher insurance premium for your car or your home insurance than your friends or neighbors. Your low credit rating score, also, may affect the premiums you pay for your home, car and health insurance premiums.

Insurance companies fix a specific premium rate for the insurance they sell, based on risk management formulas they have developed. And while doing that now-a-days many companies are taking into account their customer’s credit rating scores along with their preset insurance risk criteria to set the net insurance premium payable for each customer. This is true that there is no set rule that a person can use to determine the way insurance companies measure risk or the parameters they consider to estimate the amount of risk (if any) likely to be posed from a potential individual while striking an insurance deal with him. But it can be well understood that possessing a high credit rating and an impressive credit profile makes a person look more financially stable and trustworthy customer to the insurance firms.

Lets take an example to have a more clear understanding; suppose two home owners own same type of house, live side by side. Both applied for home insurance and got insured by the same insurance company with identical coverage. Even if both of them have no past insurance claims history, the rate of monthly/yearly premium they pay for this policy may differ from each other.

The reason of this difference in premium payment may be due to the difference in the credit scores of the two applicants. As credit ratings go up, credit score increases….so due to the difference in rating between the two men, one person may have a better credit score than the other. Customers with lower credit scores may be considered by the company to be more likely to make a claim than the one with a higher credit score.


  1. Its true that credit score has a negative effect of insurance policy. Some people fail to get an affordable policy because of bad credit rating either end up uninsured or have to bear the expensive policy. I have heard that the best way to overcome this problem to find a company that doesn't consider this factor.
    commercial insurance company

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