If you haven't given it much thought, you may not realize that your credit score can affect your insurance rates. In fact, a great credit score can help you get a better insurance rate. Likewise, a bad one may factor into higher rates. Oftentimes, there is a direct correlation between the two. It pays to understand their relationship and work on increasing your credit score.

Correlation Between Credit Score and Insurance Rates

Insurance companies consider your credit score a reflection of your financial habits, and thus, your level of risk. Just as banks are hesitant to loan money to people who represent higher credit risks, insurance companies are hesitant to give lower rates to people who represent higher risks. If your credit score is bad, then you represent a higher level of risk for the insurance company. This is because it can mean that you may be less likely to pay your premiums on time, which can cause headaches for the insurer. Therefore, if you have a bad credit score, an insurance company may charge a slightly higher insurance rate to counterbalance the risks associated with you.

To further expand, it doesn’t benefit the insurance company to sell policies to people who continually fail to pay their premiums on time or at all, just as it doesn't benefit a bank to give loans to people who are not going to pay them back. Simply put, the better your credit score, the safer of an investment you represent for the insurance company and the lower the premium needs to be to hedge against risk.

Credit scores also can reflect behavior not directly related with financial actions. For example, according to a 2003 University of Texas study, people with higher credit scores were less likely to be involved with car accidents or other events causing claims to be filed. Whether this is because people with higher credit scores are more responsible, or they are less stressed out because they are not behind on their credit, this is a good statistic to be a part of. If you have a higher credit score, car insurance providers will often assume you will file fewer claims because of such statistics. This oftentimes results in lower premiums.

Other Factors That Affect Insurance Rates

Credit scores are not the only variable that insurers look at when evaluating a potential customer. For example, car insurance companies consider the type of coverage you want, your age, your sex, the kind of car you drive, how often you drive, and so on (Read The Top 5 Factors That Affect Your Auto Insurance Premium to find out more), while health insurance companies would consider tobacco use, medical history, age, location, individual versus family plan, and more.

However, despite the fact that credit scores are just one among a number of factors affecting premiums, this doesn't mean you should overlook it. In fact, if you want to get lower premiums for insurance in the future, improving your credit score is a great way to try to achieve this.

How to Improve Your Credit Score

To increase your credit score, follow these helpful tips:

  • Avoid defaulting on payments. Doing so can significantly lower your credit score.
  • Use a day planner, calendar, to-do list, or any other organizational method that suits you to stay on track.
  • Consider setting up automatic payment for recurring bills, and immediately pay one-time or less frequent bills as soon as you receive them or soon after.
  • Do not cancel credit cards you don't use to make it appear that you have less debt. This could actually hurt your credit score.

Conclusion

Credit scores are used in a variety of insurance fields. They say a lot about your financial responsibility and thereby the level of risk you represent. Being financially responsible also reflects responsibility in general, which insurance companies like to see. This is because responsible people often file fewer claims. Because insurance companies need to price premium rates according to risk, you want to be on the right side of their statistical evaluations. Therefore, improving your credit score can help you score lower rates for a number of different types of insurance and in multiple different ways.