Understanding the Relationship Between Credit Scores and Insurance Rates
Many people have no idea how their credit score affects their insurance rates. Simply, if you have bad credit, your insurance premiums will likely be more than if your credit is good. Why? Well, that’s a big mystery, but we do have some clues into the mindset of insurance companies when determining insurance rates.
How Credit Score Impacts Insurance Rates
When purchasing a home, you may not realize the profound effect your credit score has on your home insurance rates. Therefore, if you plan to buy a home in the near future, it’s a good idea to work on your credit beforehand.
When you call your insurance company to establish a homeowner’s policy, the company will run your social security number to check your credit. Although it is unclear why home insurance companies check credit, here are some reasons why they might:
Insurance companies want to make sure you will pay for the policy before insuring your property.
They want to make sure you don’t have a history of foreclosure on homes, which could possibly lead to abandonment again.
Bankruptcy is another good reason for insurance companies to check your credit. If you filed bankruptcy in the last seven years, insurance companies are taking a risk providing you with a policy.
Insurance companies want to check your debt to credit ratio to calculate if it is feasible for you to pay for a homeowner’s policy.
Insurance Companies Reasoning Behind Credit Checks
Companies that check the credit of potential customers believe that history repeats itself. They don’t want to be a victim of delinquency because a customer is unable to pay on their policy.
You may wonder why insurance companies will give you higher insurance rates if they know you already have a history of an inability to pay. It would probably make more sense giving you a lower rate, which you can afford. The reasoning for a higher rate because of poor credit comes from an attempt to deter individuals with negative credit scores from their company as well as trying to get as much money from someone as they can before they are unable to follow through with the policy. It’s also a lesson in life, people who have good credit are rewarded while those with a tainted financial past suffer.
What to Do Now to Buy a Home Later
There’s nothing much you can do if you plan to buy a home now and have a negative credit score. Search around for the best insurance rates and pay the policy on time. They may lower your rates over time if you are good about making payments.
If you aren’t buying soon and have a couple of years, improve your negative credit scores now. One of the best ways to do this is to pay your bills on time without fail. Paying off credit is a great way to increase your negative credit scores because it will improve your debt to credit ratio. Take steps now to help you save money later!