Credit scores change up the interest rates that consumers receive for various types of loans, including charge cards, mortgages, student loans and even car insurance rates. A higher credit rating means a person will receive a lower interest rate, saving them 1000s of dollars over several years.
If you're seeking to avoid wasting extra cash on insurance • whether it's home insurance or car insurance • PayPasser has you covered. PayPasser's online marketplace allows you to view your insurance options easily and see which companies provide the best rates and deals.
But it's always a good idea to know your personal finance inside and outside, particularly your credit score, before you apply or switching insurance plans. Here's what you need to know:
Why does a credit score affect insurance?
Lenders want credit scores to look for the ability of a consumer to pay back financing on time, such as mortgage refinances, education loan refinances and private loans.
“Credit ratings are a good way for lenders to find out risk before approving a loan, like a charge card, mortgage or refinance,” said Leslie Tayne, a Melville, N.Y. attorney focusing on debt settlement. “The larger the credit score, the lower the danger to lenders that consumers will default on their own loans.”
FICO scores are among the most well-known, range from 300 to 850 and are based on credit history.
Underwriting criteria for loan approval and rates change from lender to lender, but poor credit is usually a score less than 580, she said. A score of 580-669 is recognized as fair, 670-739 is good along with a score of 740 or more is typically considered excellent.
How much does credit score affect insurance costs?
Insurance companies use a slightly different approach to determine the danger level of someone for auto, renters and homeowners insurance policies.
1. How insurance providers reference credit scores
Insurance companies want credit scores like a factor when determining premiums. States that prohibit this practice for auto insurance include Massachusetts, Hawaii and California, Tayne said. Insurance providers want credit scores to get an idea of the risk involved for that company.
“Insurance companies wish to prevent a policyholder missing payments,” she said.
2. How insurance providers use credit-based insurance scores
Most insurance providers use credit-based insurance scores to judge how likely a policyholder is to have a claim, Laura Adams, a Vero Beach, Fla.-based consumer advocate, said. Like lenders, insurers use credit like a factor when setting rates in states that permit it.
Insurance companies obtain credit scores both when you purchase a brand new policy so when your policy pops up for renewal, said Jackie Boies, a senior director of housing and bankruptcy services for Money Management International, a Sugar Land, Texas-based nonprofit debt counseling organization.
Head to PayPasser to get a better understanding of the different types of property insurance coverage and what the policy amount is. Click PayPasser's home insurance partners to get a free home insurance quote.
3. How credit-based insurance scores will vary compared to traditional ones
Credit-based insurance scores help insurers obtain a general concept of the likelihood that the claim is going to be filed.
“This type of score can help minimize the risk that the individual will definitely cost the company more in filed claims than the person is paying in premiums,” Tayne said. “Insurance providers wish to maximize profit and take on very little risk as possible.”
If you've insurance and want to lower costs or if you're looking to switch auto insurance companies, then head to PayPasser to understand more about pricing and compare quotes in one spot.
4. How these types of scores affect insurance premiums
Lower scores can lead to higher premiums. Consumers ought to keep in your mind that additional factors are taken into consideration, such as previously filed claims, location and age of the automobile and home, Tayne said.
Credit can significantly affect premiums, however it could mean that a person with a bad credit score pays exponentially increase for auto insurance than a similar driver with excellent credit, Adams said.
A person•s credit-based insurance score is yet another reason someone should maintain a good credit score and check a credit history annually for errors, Boies said. One credit reporting error could cause a jump inside your premium whenever your policy renews. Get the free credit score at www.annualcreditreport.org and dispute any errors.
Consumers can improve their credit ratings by paying their bills promptly, not implementing out too much credit and never using over 30% of the utilization ratio of the credit cards. A greater credit score gives you lower rates for your insurance plans.
“Good or excellent scores indicate that you've previously been responsible with credit by looking into making payments on time and never borrowing an excessive amount of,” Adams said. “In general, individuals with higher scores qualify for the most competitive interest rates and repayment terms.”
Credit score ranges
Credit score ranges vary depending on the company and each one uses a formula to judge a borrower based on your credit reports' information at the nationwide credit agencies: Equifax, Experian and TransUnion, Adams said.
Here are ranges to many other popular credit ratings, Adams said.
- FICO Mortgage Score: 300 to 850
- FICO Auto Score: 250 to 900
- FICO Bankcard Score: 250 to 900
- VantageScore: 501 to 990
- TransUnion: 300 to 850
Check your credit rating regularly and participate in credit monitoring by visiting PayPasser today.