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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5 Responses to “Credit Score and Insurance Rate”

  1. Minimum Wage |  Jun 14, 2007 at 3:01 pm

    My credit went from good to bad in a hurry due to an extended illness during which I was unable to work. In hospital and without income, I was unable to pay my bills, and all my active open accounts were closed and charged off.

    I ended up with a tax lien, a creditor judgment, and a bunch of chargeoffs. I am working again, earning minimum wage, but I cannot resolve those first two issues (which won’t drop off my credit report until resolved) on my income, suggesting that I might never be able to get my credit out of the tank.

    So now I quickly went from a good risk to a bad risk, and remain a bad risk indefinitely? I don’t think so!

  2. TFB |  Jun 15, 2007 at 10:24 am

    I don’t think one should be overly concerned if one has good credit. The credit score screen at the insurance companies is more likely a negative screen. If someone has bad credit, they will add a surcharge, but if your credit score is already 750, i.e. good, you won’t get a further discount if you make your score to 800.

  3. Sun |  Jun 15, 2007 at 2:53 pm

    Minimum Wage: Thanks for sharing your story. I am sure things will get better for you and there are lots of better paying jobs. It’s tough to rebuild your credit, but that’s not something that can’t be done.

    TFB: It’s true that when you have a perfect score, then none of these actually matters any more. It’s always desirable to have a good credit score, no matter what it is for, loan or insurance.