Credit Score and Insurance Rate

Early last week, Kiplinger’s Personal Finance website has an article that discusses the relationship between credit score and insurance rate. The main message of the article is that insurers look at your credit history and credit score differently from lenders. For example, the number of new credits obtained within a year plays a key role in determining the FICO score. But

insurers look a lot more closely at how you’ve managed credit over time rather than how much credit you’ve applied for recently.

In addition, insurance companies also found that

1. People with low scores are more likely to file insurance claims than people with high scores.
2. People who have a history in making late payments tend to have more claims.

The difference between lenders and insurers is lenders care more about whether one can keep paying back the money borrowed and getting too many credits in a short period of time is a sign that the borrower may have problem with money. Insurers, on the other hand, don’t have this worry. Their biggest concern is claims. Though it’s hard to verify whether the above findings are true or not, they do tell me that we need to keep a balanced credit history, i.e., not to emphasize one area (for example, no late payment) and ignore the other (such as obtaining too many credit cards too quickly), as different people will have a different interpretation of the credit report.

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