Insurance and your credit score: what you need to know

If you’ve ever applied for a home loan, a car loan or even a mobile phone contract, you’ll know that credit scores count.

They play a big role in whether you get loans, and the interest rate for these loans will be. But does a low credit score affect your insurance premium? And if you default on your insurance, does it affect your credit score?

The short answer to both questions is ‘yes’, said Wynand van Vuuren, the client experience partner at King Price Insurance. Not paying insurance premiums can affect your credit score, while conversely, a low credit score could see you paying more for insurance.

Your credit score is a three-digit number that helps lenders evaluate how safe or risky you are as a customer. It’s based on the information contained in your credit report, which is a history of all the loans and credit you’ve ever taken, and how you’ve paid them back, as well as how reliable you are with your other monthly payments, said Van Vuuren.

How your credit score affects your insurance premium

When you apply for insurance, insurers use a range of factors to assess your risk, which ultimately determines the monthly premium you will pay, said King Price Insurance.

For a car, an insurer will typically look at the age, make and model of the car; your age and driving history; the security measures at the premises where you most often park your car; your accident and claims history; and your credit score.

“Your credit score is a powerful predictor of your financial behaviour. It shows lenders and financial institutions how likely you are to pay your bills and default on debts. Combined with other factors, it helps to paint a picture to an insurer of how risky you would be to take on as a client. And yes, this risk will be reflected in your premium,” said Van Vuuren.

How not paying your insurance affects your credit score

For many South Africans, times are tough right now. TransUnion’s 2021 Q4 Consumer Pulse Study shows that more than half (55%) of households still feeling the effects of the pandemic on their finances. Of these impacted households, more than eight out of 10 (85%) remain ‘highly concerned’ about their ability to pay their current bills and loans.

But defaulting on your insurance premiums won’t only put you in a difficult financial situation if something valuable is damaged or stolen. It may also affect your ability to get insurance, or any form of credit, in the future, as your credit score will be impaired, said King Price Insurance.

“If any debit order isn’t successful it registers at the credit bureaux as a missed payment and may influence your score – which will make it more difficult to get any credit in the future, not to mention insurance,” said Van Vuuren.

And if your finances are so tight that you’re thinking of cancelling your insurance altogether, think carefully. “It’s hugely risky to cancel your insurance, as a time of crisis is when you actually need insurance the most. Talk to your insurer now and make a plan in the short term, rather than suffering long term consequences,” said Van Vuuren.

Credit score meaning

Your credit score and other factors affect whether you will get approved for credit, how much you can borrow and, most importantly, how low or high your interest rate will be, said Ester Ochse, product head: FNB Money Management.

“A credit score is basically a report card of how well you manage credit given to you by various financial institutions and retailers. Products like credit cards, personal loans, home loans, and retail store cards are some examples of the forms of credit one can receive from financial institutions.

“Your credit status is usually shown in a number format on various credit bureaus, and the higher the number, the better you have been managing your current and past credit,” said Ochse.

This score indicates to financial institutions the level of risk they will take if they extend you credit. The better your credit score, the more chance you have of receiving credit and potentially at a better interest rate, said Ochse. The lower your credit score, the less likely you are to get credit, and if you do, the rate will be higher.

These are factors that negatively impact a credit score:

• Being late on monthly payments
• Missing monthly payments
• Frequently applying for credit
• Having credit usage continuously going up
• Having a judgement against you
• Being declared bankrupt

There are a few steps that can be taken to avoid negatively impacting your credit score, said Ochse. “Align your debit order dates as closely as possible to your salary date. This way, you know they will be paid, and you don’t have to worry about it. Have an emergency fund in place for unforeseen events and expenses; this way you don’t need to rely on credit.

Set up and stick to a budget. Check your score regularly to ensure you are on track and spending money on things that are important.”

Read: South Africa is heading for big interest rate changes – what you should know