As you may know, your credit is used for purposes other than setting up loans. Bad credit can really cost you a bundle when it comes to insurance. Insurers use your credit information to set your rates. Typically, they use an insurance score developed by ChoicePoint, Fair Isaac, or in-house developers.
Different insurers use your credit in different ways. Some of them don't even use credit information when they look at your policy. However, those that do want to see a good credit history. If you've got good credit, you can expect to get attractive discounts from these companies. A Michigan study in 2002 found that an average discount for consumers with the best insurance scores was about 35 percent. Would you like to save 35 percent on your auto insurance and homeowner's insurance premiums?
Remember that your insurance score is different from your credit score. They are based on information in your credit reports, and they may have a few pieces of additional information. The factors that make up good credit (paying on time, avoiding bankruptcy, etc.) will also lead to a good insurance score, so you should just strive to have good credit.
Other studies, and anecdotal evidence, show that bad credit can yield even more dramatic results. In recent years, news reports have told disturbing stories about consumers who suffered due to their bad credit. In some cases, premiums increased tenfold for a simple automobile policy. In other cases, an individual was unable to renew their insurance at all. Imagine going without auto insurance, even if it was only temporary. You might be unable to commute to work, which would create additional financial hardships. If you did drive to work, you'd be taking a huge financial risk: an accident could cost tens or hundreds of thousands of dollars.
In 2003, the Texas Department of Insurance issued a report that showed, among other things, how credit information affects rates in the area. They found that consumers with the worst credit history pay anywhere from 19 percent to 113 percent more than consumers with the best credit history. Individual credit scores were not part of the report, but you can see how good credit in general will help you save money. A few missed payments can do the damage that will change your insurance rates.