I’ve always thought of credit scores as junior varsity personal finance numbers.
I mean, yeah, I knew credit scores were important. But nobody was gonna convince me that a FICO figure was a critical stat like net worth or portfolio allocation or gross annual income or savings rate.
Those biggies are true varsity team starter material. You can’t win without them. Maybe let FICO participate in drills and scrimmages. But FICO’s not gonna be in the voting for team MVP.
I felt this way knowing full well that credit scores have direct consequences for individuals’ borrowing capabilities and costs. This is, after all, what FICOs are for. If you’re a credit risk, pay up. If you’re a really big credit risk, see ya later.
Which meant I dismissed FICO knowing that a good score means you get a better rate on your mortgage and have advantageous access to borrowing facilities and get to feel really cool for scoring an 800+ on something.
And, yes, I knew that cheaper capital and easier access to capital are important things. No question. Yes, they’re absolutely useful for building and maintaining wealth. True. True. True. And yet, still, I’d relegated FICO and credit score stuff to the practice squad of personal finance figures.
But I was wrong about that.
It turns out there’s something much more to the FICO/credit score story. Like 200% more.
Something I read in a recent Wall Street Journal article caught my attention and I thought I’d bring it to yours: Better credit scores dramatically lower the rates you’ll pay on insurance.
Or: Having crummy credit means you’re paying through the nose for must-have stuff like auto, homeowners and other insurance products… While your rich uncle, who can afford to pay nosebleed rates without even noticing the gore running down his face, gets the same downside risk protection for a fraction of your cost.
The effect is not small (which I had wrongly assumed). The effect is gigantic.
Call FICO on up for the varsity team. I was wrong about FICO. FICO’s a starter. And maybe in the running for MVP.
Since FICO’s now a starter, let’s get FICO a number. Or a few numbers.
FICO scores range from 300 to 850. If you’re in the range of 800+, you’re killing it. Your borrowing rates are gonna be rock bottom. And your insurance costs will be low. (Details on that in a tick.)
If you’re anywhere below 670, you got some work to do. You’re paying through the (bloody) nose for access to capital and for risk protection. Which is bad. And stupid. And you’re probably not stupid. So stop acting like it and fix your score.
Note that if you’ve got a “Poor” or “Fair” reading, you’re hardly alone. Around 36% of us ‘Mericans score in that range. Nearly half of us have credit score ratings in the “good” and “very good” tiers. And less than one-fifth of us are rocking 800+ figures.
You already know how to fix your credit:
- Pay down balances and pay bills on time;
- Maintain a good number of varied credit lines for long periods;
- Don’t file bankruptcy or owe tax authorities or other people penalties;
- Limit inquiries for new borrowings; and
- Don’t be a scrub
Note that these factors are “weighted” in the FICO formula; not all factors are equally important. The nearby table summarizes the impacts generally, though the particulars of the FICO math are not publicly disclosed, vary slightly from person to person and change on occasion, most notably with the movement toward full adoption of “FICO 9.”
So what’s the payoff for elevating your FICO score from scrub to stud?
According to our compadres at the Wall Street Journal:
“Customers with poor credit could pay twice as much for insurance as those with excellent credit…. For example, a hypothetical homeowner in Ohio who paid an insurance premium of $721…could see his premium increase 185% to $2,057 if his credit drops from ‘excellent’ to ‘poor.'”
That’s over $1,300 in higher costs. For the same coverage. On the same house. For the same dude. Just because that dude’s credit is riding the pine! In Ohio, no less!
The same sort of effect applies to other insurance products, including auto insurance and even umbrella insurance (which is a crucial type of coverage for high net worth individuals and households).
In fact, the impact can be just as great on auto insurance as homeowner’s insurance. (Yet another FICO/insurance surprise here for old FL.) According to the savvy bros over at Consumer Reports:
“…your credit score could have more of an impact on your [auto insurance] premium price than any other factor. For our single drivers in Kansas, for instance, one moving violation would increase their premium by $122 per year, on average. But a score that was considered just good would boost it by $233, even if they had a flawless driving record. A poor credit score could add $1,301 to their premium, on average.”
What’s $1,300 a year, you ask? It’s about equivalent to the annual interest paid on $140,000 held in a 2-year gummint treasury.
And if you’re saving around $1.3k on each of home and auto insurance products every year, that’s like having almost $300k banked in bonds and spinning off interest. I wouldn’t say no to that kind of action, even with today’s limbo-low interest rates.
Want to save four figures every year on homeowner’s insurance that you have to carry so long as you’ve got a mortgage (and probably ought to have even if you own your casa outright)? Fix your credit. Like pronto.
Want to save even more money on the auto insurance that you have to carry if you own a car? Fix your credit.
Want to be varsity-team stud rather than JV scrub? Fix your credit.
So, yeah, I didn’t know that crummy credit would mean peeps pay around 200% of the insurance costs of true bros with excellent scores.
Since I was surprised by the size of this effect, I thought it might be worthwhile to mention it here.
Hopefully this motivates those with lower scores to get game faces on – there’s lots of money on the line. And hopefully it makes those with higher scores happy to know how studly they are – since, you know, there’s lots of money they’re stuffing into their jerseys.
Also, if your credit score has improved since you initiated insurance coverage for auto, home, umbrella, etc., it might be worth checking in with your provider and/or shopping around since you could find big savings just by having your improved credit score taken into account for pricing.
Luchadores, have you had personal experience with the impact of a poor/excellent credit score on insurance costs? Holla!