Why Your Insurance Needs Your Credit History
Why does your insurance need your credit history? This a perfectly valid question, and one that a whole lot of people ask. It turns out insurance needs your credit to assess your risk as a policyholder. That’s right, beyond your driving record and car details, insurance companies take a deep dive into your credit history to assess your risk as a policyholder. But how exactly does your credit score translate to how safe you are behind the wheel (or how likely your house is to burn down)?
This article will break down the surprising connection between credit and insurance, explore why insurers use this information and even offer some tips on how to improve your credit score to potentially snag a better insurance deal. So, buckle up (carefully!), and get ready to learn why keeping your finances in good shape can also save you money on your insurance premiums.
Financial responsibility
Insurers use your credit score to decipher how financially responsible you are – how likely you are to pay your premiums, how responsible you might be when driving, how you care for your house, and how likely you are to burn down your place of residence. A good score tells them you’re financially responsible and will pay on time.
Likelihood of filing claims
Insurers really don’t like when you file claims, as this means they have to lose their money. They’re more about collecting premiums than paying out claims, which is why it’s better to pay out-of-pocket than to file claims, which in turn lowers their loss ratio. Insurance companies usually consider a loss ratio between 0 and 60% ideal. If it exceeds 60%, insurers start monitoring your policy closely. At 80%, they start to initiate corrective measures like imposing additional compulsory excesses and/or increasing premiums. If it reaches or exceeds 100%, they typically restrict cover or even consider cancelling the policy. This situation is not sustainable in the long run and could lead to financial difficulties for them.
Risk assessment tool
Lastly, by considering your credit history, as well as your history and insurance history (attained by other insurance by something called a broker’s note), the insurer gets a more comprehensive picture of your risk profile. This helps them determine a fair price for your premium– what you pay for insurance.
In essence, insurers use your credit history to decide whether they should insure you and how much they’ll ask you to pay according to how risky you might be as a policyholder. By practising good credit habits, like holding a variety of credit portfolios, paying on time, and maintaining a low credit utilisation ratio, you’re more likely to get a better premium or policy. To check out how good your credit is, make use of our free credit checker. It’s easy to use and even better, completely free! Feel free to reach out if you have further questions, we’re here to help.
