With most Insurance companies, your credit is the primary factor in determining how much you will pay for insurance.
Unlike your FICA score out of 850 that a mortgage company will use to determine the interest rate on your home, there is no set structure to how insurance companies use your credit to determine the basis for your insurance rates.
But they most certainly do use your financial history in most states.
Unlike the set FICA score, the three credit bureaus dump data into a big database and allow the insurance companies to sift through this data and determine what historical factors they believe have the highest correlation to you filing an insurance claim in the future.
This is an easy process for them because they know what your credit history is, and they know what your claims history is. They just need to find the highest correlations between the two.
Each company will choose slightly different factors and will weigh those factors differently. Other credit factors they may completely ignore.
The following is a shortlist of factors I see in my insurance brokerage that insurance companies want to see for them to offer better rates:
High-Limit, Low-Balance Cards
This means a limited number of credit cards with the highest limits possible and very low balances on those cards. They want to see that those cards have been opened for long periods of time.
If you have more than three credit cards, I recommend you start closing some. If you have forgotten credit cards and no longer use them, close them.
Limited Credit Splurges
The Insurance companies do not like to see that you are trying to borrow money. Try and minimize this activity.
No Missed Payments
Make sure there Is nothing in collections and no payments missed. If there is, clean this up. I often hear potential clients say something like, “I didn’t pay the bill sent to collections because I don’t feel like I owed it.”
In the long run, they will pay significantly more in increased insurance costs than what it would cost to swallow their pride and resolve the issue.
Avoid Bankruptcy & Foreclosures
This is an obvious one, but try and stay away from foreclosure and bankruptcy.
Sufficient Credit History
If you don’t have a credit history, like I will see with younger clients starting out, clients moving in from outside the country, and sometimes older individuals that have everything paid off and don’t use credit cards, start working on getting a credit history.
Even though you may need insurance now, we can create a plan to improve your credit history. We can shop your insurance again in the future as things improve.
A Better Credit Score for Lower Rates
Get a copy of your credit report from one of the three credit bureaus and see what is on those credit reports. Make sure there are no surprises you are not aware of. Take the time to fix what you find on your report.
I often have clients ask me if they are going to have a problem with getting financing on their home if the insurance companies are looking at their insurance. Rest assured, what the insurance industry does is considered a soft hit and not a hard hit.
In other words, there are no records shared of the insurance companies looking at your credit history to determine pricing. Insurance companies looking at your credit information will not lower your credit score.
If you have bad credit, the good news is some insurance companies rely less on your credit history and more on other factors like your claims history and driving record.
Working with an experienced, professional insurance broker will help you navigate the different insurance companies and help you find a fit that is optimal for you.