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Insurance and your credit score: what you need to know

Published Mar 4, 2022

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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”, says 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.

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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.

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. 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,” says 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.

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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.

“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,” says Van Vuuren.

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If you’re interested in seeing your credit score, you can download your credit report once a year, for free, from TransUnion or any of the other credit bureaus.

PERSONAL FINANCE

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