If you contact your insurer or insurance broker to insure your home or vehicle, you should know that they will ask your permission to check your credit score. This is a review of your report, not an application for credit. Although you have every right to refuse, there are a few things we would like to clarify about this.
In this article, Assurances Multi-Risques has decided to talk to you about credit scores, second chance credit and high interest rates. By the time you reach the end, you’ll know how and why they affect your ability to get insurance!
What is a credit score?
Did you know that credit reporting agencies keep a record of your credit history? In Canada, the main credit reporting agencies are Equifax Canada and TransUnion Canada. They collect information about how you use credit resources such as credit cards and loans, and how you pay your bills. This information is then used to establish your credit history and credit score. In Canada, credit scores range from 300 to 900 points, with the highest score being 900 points.
Your credit score is one of the key tools that lenders use to determine if they can lend you money and what interest rate they will offer you. Employers, landlords and insurers can also check your credit report to get an idea of your reliability. Note that your credit score changes over time, so don’t worry if your score is low at one point; you can always improve it.
Why does your credit score affect your insurance?
Your credit behaviour gives your insurer an excellent indication of your ability to maintain and repair the property it insures. Moreover, studies have shown that credit score is a key indicator in assessing the probability of a claim. The higher the credit score, the lower the risk of a claim, and vice versa.
Therefore, an insurer will be more inclined to insure a person with a good credit rating, just as it may refuse to insure a person with a poor rating.
Here are some tips for improving or maintaining a good credit record. You’ll also avoid insurance problems!
- Always make your payments on time. If you can’t pay the full amount, at least make the minimum payment.
- If you think you might have trouble paying a bill, contact the lender right away. See if you can make special arrangements to pay off your debt.
- Try to use less than 35% of your available credit.
- Limit the number of times you apply for credit within a short period of time. It’s best to apply for credit only when you really need it.
- Combining a variety of credit products could earn you more points, but don’t overdo it! Make sure you can pay back the money you borrow. If you can’t, you could hurt your credit score by borrowing more than you are able to repay.
(Source: Financial Consumer Agency of Canada)
Be careful with second and third chance vehicle financing!
We know that life isn’t always easy. Even if you’ve lost your job, are unemployed, have accumulated debts or are burnt out, you may still need to buy a vehicle to get around. Securing a loan or lease under such conditions can be complicated. As a result, it can be tempting to resort to second or third chance financing, despite the high interest rates.
However, you should be aware that simply going through a substandard creditor for vehicle financing will automatically affect your car insurance. Most standard insurers refuse to insure vehicles with interest rates above 10%.
Substandard creditors promote themselves as saviours with their “Second Chance Credit” and “No Refusal” slogans. However, as you now know, opting for second chance financing not only involves exorbitant interest rates, but often leads to complications with your insurer. At Assurances Multi-Risques, we understand that no matter what your financial situation is, buying a vehicle can sometimes be essential. If getting financing from a second chance creditor is unavoidable, we encourage you to contact an independent insurance broker specializing in substandard car insurance before finalizing your purchase. This way, you will avoid unpleasant surprises and more debt!