Your credit score can have a more significant impact on your insurance premium than you might imagine. This is because insurance companies these days are taking into consideration credit scores, besides other usual factors, to determine someone’s insurability.
Primary reason why your credit score is given so much importance when you apply for insurance is to determine your chances of making an insurance claim. The correlation between poor credit history and likelihood of someone filing a claim has been proven time and again through various studies.
It has been found that people with bad credit are more likely to claim insurance as compared to those with good credit. A possible explanation behind this belief is that if someone is not careful with his money, then he might show same carelessness in other aspects of his life as well, such as driving.
Depending on credit scores people are divided into high and low insurance risks and then accordingly charged a premium which is equal to assumed risk. Generally five categories are included to evaluate your credit score, which can give insurance company a fair idea of whether you fall into the category of high or low risk. These include your previous payment history, total credit amount, time period since the credit is established, any new credit and types of established credit.
While the topic of whether credit information should be a decisive factor while approving or denying insurance coverage or setting premiums is up for debate, it is true that insurance companies are striving hard to lower the associated risk while approving anyone for insurance.