Credit Scores Determine Insurance Premiums

John Vaughan (Financial Advisor) @ Lucid Living

You’ve just bought the home of your dreams. The next stop is to protect your purchase with insurance but, to your amazement, the insurance company has turned you down. You consider yourself a good risk: no previous claims, your home has an impressive security system, is located in a safe neighborhood. So why were you denied coverage? A poor credit report could be the culprit.

These days, having some black marks on your credit report may mean more than paying a higher interest rate on your credit card. A growing number of companies — many of them having nothing to do with the business of offering credit — are also scrutinizing the information on your credit report to decide whether to do business with you, and how much to charge.

Most of the 10 largest short-term insurers in SA use the information in your credit report to underwrite new business, and many do so not just to decide whether to insure you, but also to help determine the premiums charged, according to a recent industry study.

Insurance companies argue that a credit report is a good indicator of the likelihood that a policyholder will file a claim. Some even say that in some cases what’s on your credit report can be more important than what’s on your driving record, according to the study.

“We know that there is a correlation between how someone manages their credit and insurance losses,” says a spokesman for Outsurance, one of the largest motor vehicle insurers in SA. But what’s not altogether clear is why. “We’re not sure,” admits Van Rensburg. “But we know it’s a fact.”

Insurers evaluate you based on your credit report / credit score. Many insurance companies use your credit score, in conjunction with their proprietary risk scoring systems. How heavily your credit score will be weighed also depends on the insurance company you use. At one insurer a poor credit score could cost you 35% to 40% more in premiums, while at another it could disqualify you from obtaining insurance cover.

What does this mean?

If you’ve never had a car accident or made a claim on your homeowner’s policy, you could have a poor or an erroneous credit report used against you. Your credit score could be the reason you are declined cover, paying a higher premium, larger excess and why your annual increase was several percent higher than the average.

What to do?

• This “to do” cannot be stressed enough – GET YOUR CREDIT REPORT!

• Ensure that the information on your credit report is accurate, up to date and valid.

Challenge any erroneous information on your credit report.

• Take appropriate steps to improve your credit score over time.