Sunday, February 13, 2011

Good Credit Saves You Money On Insurance - Sorry Dave Ramsey

The Dave Ramsey ShowImage by .imelda via Flickr

To get good rates on insurance you must have a good credit score. Our friend Dave Ramsey says swear off debt and let your credit score go to zero. If I do this my insurance rates will go up. Insurance companies take a look at your credit before providing you with a quote. Insurers have determined that a persons credit history tells a lot about what type of person you are. 

Now don't get me wrong. I am a fan of ol' Dave Ramsey. I drank the kool-aid long ago. But his idea of completely being off the debt grid is not for me, quite yet. I still need the effects of a good credit score. I tip my hat to Dave Ramsey everyday for showing the way, he will have to forgive me for this one detour off the plan.

When you apply for any kind of loan, lenders will look at your credit history for the following things. How often you have applied for credit. How you pay back your credit and what your overall credit history looks like.

According to this report you are either issued credit or told to hit the road. Insurers also want to look at the report for many of the same reasons. They want to get a general understanding of your overall financial picture. They also want to see if you can afford the premiums and how well you manage your credit.

They believe the way you take care of your credit will be the way you take care of their insurance. Bottom line low credit scores equal more claims.

If the insurance companies can tell if you will file more claims by your credit score, the way they do it is a well kept secret of the industry. There is no evidence of such a correlation being true in the general public.

Is it legal for the insurance company to access your credit report? Yes because when you sign the insurance application, in the fine print it says you are giving them permission to. 

Factors contributing to someone's credit score...Image via Wikipedia

If you ask the insurance companies to not access your credit report they will probably say they will not be able to write you a policy. I can understand how factors like your past insurance claim history, location, marital status, age and income are proper in using to determine your risk level. But credit history, no.

Not only do insurance companies use your credit report. When you rent an apartment you can be turned down if the landlord sees you are not a good payer of your bills. The landlord may even charge you a higher deposit because of your poor credit. 

Cell phone companies access your credit worthiness when signing you up for a cell phone contract. You can be turned down because of a bad credit score. A low credit score would mean they would have to charge you a high deposit.

What would Dave Ramsey do in situation? He would rather have no credit score and be debt free and pay the higher premiums. I guess for him it's OK to pay extra, because he has the money to. He is the no debt guru, so it would be hypocritical of him to not do so. But for me I'll keep my credit score high so I can save some money on insurance. Maybe just having a mortgage is enough.

Remember check your credit score at where you can get a free credit report. You get one credit report per year per credit reporting service. There are 3 services so you can actually get 3 reports per year for free.


  1. The way the credit score game is played being out of debt can have a negative impact. On the other hand, my goal is to be self financing so I'm not too worried about it.

  2. That’s a good way to look at things. I quite agree, it is risky not to have a credit report as I don’t imagine your car insurance company believing that you are completely credit free instead of, that , none wants to give you credit!


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