Did you know there could be a connection between your credit score and your insurance rates? In every state except California, insurance companies generally have the ability to review your credit score and payment history as a factor in determining your rates.
Why would insurance companies care about your credit? Aside from assuring them that you are more likely to pay your bills, it shows a pattern of responsible behavior. If you handle your credit responsibly, you are probably more likely to drive responsibly as well.
Insurance companies put a positive spin on this. Instead of characterizing this as a system for penalizing irresponsible financial behavior, you receive what is known as a Financial Stability Discount by exhibiting responsible financial conduct.
Each insurance company has their own method for determining a Financial Stability Discount, and the methods are kept proprietary. As a result, you are better off shopping around if you have questionable credit – you may find a significant difference in rates.
The discount may be a single discount if you meet basic criteria, or tiered based on levels of risk. Ask your insurance agent if you can receive further savings through improving your credit.
If you do not know how discounts are calculated, how can you ensure that you receive one? The best way is to use the same common-sense steps that keep your credit score high.
- Check Your Credit Report – You are entitled to one free copy of your credit report from each agency within a 12-month period at www.annualcreditreport.com. Make sure that your credit report does not contain any errors that could disqualify you for a Financial Stability Discount.
It takes some time to correct these errors, so if you find any, start the correction process as soon as possible.
- Pay Bills Promptly – Pay all of your bills on time. If bills require payment in full, pay the full amount; if bills allow minimum payments, make sure you pay at least the minimum. Late bills or bills that have been turned over to collections will harm your chances at a discount.
- Keep Debt Low – Minimize the number of credit cards that you use, and keep your overall debt level low relative to your income. Having multiple credit cards and/or extensive debt puts you at risk of an unexpected expense sending you spiraling into debt.
If you are in a position to make no more than the minimum payments on credit cards, that is a red flag that you need to cut back on spending.
- Watch Your Credit Utilization – Credit utilization is the amount of credit you use compared to the amount that you have available (the cumulative limit of all your credit cards). Low credit utilization is best (below 20%), and credit utilization over 50% raises red flags. A credit card that is maxed out will seriously jeopardize your Financial Stability Discount.
This has more to do with the ratio of debt than the actual amount of the debt. A credit card debt of $3,000 on a card with a $5,000 limit causes more concern than a $3,000 debt on a card with a $20,000 limit.
If you have a good credit score and a solid payment history, be sure to ask your insurance agent if a Financial Stability Discount is available. If you find you already have one, ask if there is some way to increase it. If you do not have a good credit score, Financial Stability Discounts give you one more good reason to limit your spending and get your credit under control.
If you would like to monitor your credit to prevent identity theft and see your credit reports and scores, check out our credit monitoring service.