The impact of credit score on the ability to get loans and also on the rates at which one gets a loan is now well known. In certain instances the credit scores are known also to impact the ability to get a job depending on the recruiting company’s polices. Well, as economies move towards financial inclusion, more and more people are likely to get access to formal banking channels, have access to credit and also insurance. Thus in such a world it is imperative that one aspect impacts another. Thus just like credit score has a bearing on the lender’s decision to grant the applicant loan or not, it also influences your insurance premiums. So an insurance company may seek the credit report of the client before agreeing to provide them insurance cover and also to decide the rates at which they get the cover.
Credit Score and Insurance:
Thus in a nut shell the credit score can impact all financial transactions which includes insurance premiums too. Just like lenders need to be sure about the risk profile of the person they are lending to similarly the insurance providers also need to be sure about that. While it can be argued that the credit history will not influence a person’s age or health status in case of a life or health insurance and nor does it impact the driving skills of the driver when it comes to auto insurance but it has an important bearing on insurance premiums; we explain how.
Insurance premiums are calculated based on a lot of factors; the basic idea is that the insurer wants to know what the chances of the insurer filing a claim are. Higher the chances for a claim being filed, higher they would charge as a premium. Thus for a life insurance policy as the age increases so does the premium and in case of a health insurance risk factors like smoking or conditions like heart issues, diabetes up the premiums. There are other factors also like for a car it will be the car model and so on. So to sum it, a lot of variables impact the insurance premiums and credit history is one of them.
By looking at your credit history the insurer can estimate if you are a high risk candidate or a moderate or a low risk one. Unlike mortality tables available for life insurance premiums there are no clear cut guidelines for it and it is still a little subjective but there is a statistical correlation that exists between the credit score and the likelihood of filing a claim. Thus somebody who has been an irresponsible borrower, has missed payments, has settled a debt or is always late can be termed as a high risk candidate. The insurers are likely to view this unfavorably and based on the correlation that exists they are likely to charge higher premiums.
So someone who has a higher credit score is likely to pay lower premiums compared to someone who has a low score. Thus if you are looking at paying lower premiums for your insurance plans then you could consider to try and increase credit score. A healthy credit report is a sure shot way to get your loan application approved, get favorable interest rates and also pay lower insurance premiums.
The insurance company along with the risk formulas that they have will also factor in your credit rating to calculate the insurance premiums for your polices. A stable borrower is more likely to be trusted then a non-stable one as revealed by the credit report. Having said that it is not only the score that will be considered by the insurer but they are likely to view the report in a holistic fashion. Thus if there are genuine reason for default and you are able to explain them then you may not bear the consequences of a low rating.
Unlike loans, insurance covers are almost a necessity especially when it comes to car, health and life insurance. Thus one may not be able to postpone the decision of getting an insurance policy in all instances waiting for the score to improve. Thus it makes sense to be a responsible borrower at all times. It not only keeps you stress free and financially healthy but has incidental financial benefits too.
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