It’s common knowledge that your credit score determines your ability to land a job, acquire a credit card with a decent annual percentage rate, finance a new home or car, or even successfully get a loan from a bank. But only recently is it coming to light that it also determines how high or low your insurance premiums can get. There are many factors that go into calculating your premium – the basics would be your age, gender, marital status, state you live in, occupation. The fact of the matter is your credit history is also taken into account when insurance companies evaluate your application.

The debate whether credit scores and insurance rates are necessarily correlated is still ongoing. Many wonder at the logic behind a person with a bad driving record getting lower car insurance rates than someone with a mediocre credit score. Or the case of the person with a weight issue getting lower health insurance rates over someone with a so-so credit rating. To top it off, in these hard times, we struggle to make ends meet and therefore prioritizing which bill gets paid on time would often result in having to sacrifice the credit card bill or defaulting on your student loans just to make certain that your insurance premium is settled. Some would be surprised to find out that even though they strive to stay on top of their insurance at the expense of other financial obligations, they have been dropped by their insurance companies due to their dropping credit ratings. Still other companies may find it fitting to capitalize on this by hiking up their clients’ insurance rates to skyrocketing proportions.

Unfortunately, there are no federally-set laws and regulations governing insurance companies. Each state has their own laws with regards to what information insurance companies can use when determining your insurance rates. On the flip side, not all states allow the use of your credit score to determine your premiums and not all insurance companies use credit ratings as a determinant of your insurance rates. Verify this with your state’s insurance department before purchasing insurance.

The truth is, studies have shown that there is enough of a correlation between a person’s financial history and that person’s future insurance loss potential. This is why insurance companies consider this when underwriting an applicant at a cost that most precisely indicates his or her particular risk.

When you think about credit ratings, you usually think of a person’s credit reports and FICO scores. This is not entirely accurate because a person’s credit rating is all relative to how it is actually being used. For instance, your credit rating will almost always be different when applying for a home loan as opposed to when applying for a car loan.*

A credit report requested for a person applying for a car loan places more weight on your history of car payments, or lack thereof. A recent repossession of a vehicle will make it difficult for him get a company that will assist in financing for another car. Whereas if that person were to apply for mortgage using the same credit report reflecting a recent seizure of his car will more than likely have a higher FICO scores than he did when applying for a car loan.*

Generally, insurance providers and credit providers alike consider people who pay their bills on time to be more stable and less of a risk. Repeated delays for payments and multiple credit cards that are maxed out are indicative of a fiscally irresponsible individual resulting in raised premiums.

Take advantage of your yearly free annual credit reports to analyze where your score needs improvement and how you can work towards achieving that. Checking your credit reports regularly will also help enlighten you with regards to any mistakes that a credit card company may have documented and get it sorted out.

Most states demand insurance companies to disclose the factors considered to determine your rate. Call and find out which insurance provider in your state does not use credit ratings as an important aspect in their evaluation. Be forewarned though that these companies that provide coverage with such loose regulations may come at higher premiums. Insurance companies that don’t do credit checks almost always automatically assume that you do not have a reputable credit rating and will factor it into your premium thusly. *

If, however, you find no such insurance company in your area and until such time that you are better able to stay on top of your debts, there is not much that you can do to change this process. What you can do is to ask about discounts for safety and security features, like car alarms or anti-theft devices in your home, that you can add and you might find that it significantly lowers your premiums.

Finally, make a point out of shopping around and comparing insurance premiums and policy offers with different providers at least yearly. It’s almost guaranteed that there is one insurance company out there that will give you more value for your money.



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