Insurance Block: Bad Credit Can Stop a Policy

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Insurance companies using credit scores to determine whether a customer “fits the bill” is just another byproduct of the Great Recession – but it is one consumers have to prepare for.

So let’s take a look at what insurers look for in their credit score calculations – and what consumers can do to win the credit score battle.

Q. What types of insurance companies take a closer look at credit scores?

A. Mostly homeowners and auto insurers – two of the more retail-driven corners of the insurance industry. Credit has been tight during the Great Recession, and insurance companies, much like banks and lenders, are being increasingly prudent about those with whom they do business. Naturally, home and auto purchasers would rank high on the list of customers needing ‘scrutiny” in the form of rigorous insurance company credit checks.

Q. Is it all about my credit-worthiness? Or is there more involved?

A. Insurers are a different breed of cat in the financial industry. They spend hundreds of millions of dollars “predicting” consumer behavior (i.e. whether you’ll ever file a claim or not, and how much the claims you do file will cost the insurance company). These are both highly-important factors to insurance companies, and a good, thorough credit report can help them determine what type of “claim risk” you’ll turn out to be. So it’s not as much your past financial behavior that counts for insurers; it’s what you might do down the road.

Q. So there isn’t an emphasis on past financial behavior?

A. Not so fast. While data on the probability of future claims is a big deal with insurers, it doesn’t mean they won’t take into account your financial past. Specifically, insurers will want to know if . . .

  • You pay your bills promptly.
  • If your credit card maximums have been reached (and if not, how close are to maxing out on your card)
  • How much debt you’ve compiled
  • How long you’ve had credit
  • If you had any history of bankruptcy, late payments on big-ticket items like monthly mortgage payments, or if you’ve ever defaulted on key loans like student loan debt.


Q. What happens if I get turned down for insurance?

A. By law, the insurance company must provide you with specific reasons why you’ve been rejected for an insurance policy. They have 60 days to do so. Sometimes insurers will take you on as a customer, but charge you higher premiums under the guise of an “increased credit risk.” Your best moves here are to pay down any and all debt as soon as possible. Sure, that sounds overly simplistic, but the sooner you cut your debt load, the faster you’ll be in the good graces of insurance companies – and that could mean thousands of dollars in savings on insurance payments.

If it takes you six months to a year, or even longer to pay down debt, then wait to re-apply for insurance. It’s not the ideal situation, but every time you’re credit is reviewed by an insurance company or any other creditor, you get dinged on your credit report.

To grab a copy of your free credit report (a good idea to see how you look to creditors) visit the BankingMyWay Credit Center.

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