Grabbing home, health, and car insurance plans might seem like an excessive money drain, but the truth is that insurance plays an essential role in keeping you financially stable.
This is the case no matter how old you are or what stage of adulthood you’re currently in. Insurance is essential, but let’s not beat around the bush: it can get ridiculously expensive having to pay for multiple policies at the end of each month.
This is especially true for people who are still starting their careers, as they may not have the resources or income level to pay for several insurance plans on top of their everyday expenses.
If you are a youth who’s struggling to stay on top of insurance premium repayments, we get the struggle. Fortunately, there is a way to reduce future insurance premium rates—and that’s by tightly managing and building your credit score.
This begs the question: How can I build a credit score in a way that sets me up for an advantage later in life? Excellent question. In this article, we’ll dive into ways you can build your credit score to ensure that your insurance rates stay manageable.
Let’s jump right into it.
In This Article:
How Your Credit Score and Insurance Plan Tie Together
Your credit score is one of the main factors that insurance firms consider when calculating a client’s insurance quote.
The credit score is a numerical value that indicates a person’s ability to repay debt obligations, typically ranging from 0 to 1,200. The higher the credit score, the more likely it is for the individual to pay on time.
Insurance agencies assess a customer’s credit score to evaluate their likelihood of paying on time. They can also gain access to the number of open financial accounts an individual has, their total debt, and any past-due payments they may have pending.
When a credit score is on the higher end, this signals to insurance providers that they’re dealing with a low-risk individual. As a result, insurers are more likely to give them a better deal for their insurance policies.
Conversely, if someone has a poor credit score, insurers will offer an expensive quote or outright deny the individual’s application.
As such, if you want to gain access to the best insurance plans, it’s essential to build your credit score as soon as you can. Your credit score will carry over as you age, so consider upholding positive habits sooner rather than later.
Do All Insurance Providers Look at Credit Scores?
Nope! Not all insurance providers look at an individual’s credit score when pricing their insurance.
Some car insurance providers even go and beyond and provide no additional excess fee for young drivers—which not all insurance providers do considering the inherently high risk of this shouldering the collisions made by this demographic.
However, a strong credit score boosts your chances of approval as it’s indicative of a strong financial profile. So, consider building it for increased flexibility.
5 Ways to Build Your Credit Score As a Young Adult
By now, you should be aware of the connection between the price your insurer will charge you and your credit score.
With that, let’s look into five ways young people can build their credit score to improve their ability to get more affordable insurance plans.
1. Build a Base With Starter Credit Cards
As with many things in life, it’s smart to start small before working your way up to more complex things. This philosophy applies when building a credit score as well, especially if it’s your first time.
One of the most effective ways to steadily grow your credit score is by securing a credit card under your name. Ideally, you should start with a basic credit card with a low limit. A low limit ensures that you don’t end up incurring more debt than you can pay off early on, which can greatly reduce your credit score as a consequence.
With your starter credit card, make simple purchases on it and pay your bills on time at the end of each month. Building a prompt repayment history can gradually increase your credit score. Once you get the hang of this habit, then you can apply for higher-limit credit cards.
2. Automate Bill Payments
In some cases, the problem isn’t a lack of funds—it’s simply the fact that paying bills like your insurance premium on time is easy to forget or overlook.
One way to take the pressure off your memory is by automating bill payments.
Set up your bank account to directly debit your insurance premium—as well as other recurring bills like utilities and subscriptions. You can ask your bank’s relationship manager or an office agent to set it up for you. Doing this ensures that you’ll be making on-time payments, granted that you have enough money in your bank account to pay them off.
3. Don’t Use More Than 30% of Your Credit Limit
Another habit you should adopt is to keep a healthy credit-utilisation ratio. This ratio represents how much money you’re actually using per month over your total allowable limit.
It’s recommended to keep this percentage below 30%, like spending only $300 on a card with a monthly limit of $1,000. Keeping the limit low ensures that you can actually handle the payments. But more importantly, it also signals to creditors that you’re in control of your spending and aren’t overly reliant on your credit card.
By staying below the sweet spot of 30%, you can improve your credit score over time and position yourself as a low-risk customer for lenders.
4. Monitor Your Credit Report
Young drivers should always monitor their credit report whenever it gets sent to them. You can get ahold of these reports from agencies like Equifax or Experian every three months.
The reason why these reports are essential to browse through is because it helps ensure that no errors or suspicious activities are present in your credit report. Insurers may request this piece of information to assess your profile, so it’s important that it’s in as good of a standing as possible. If you find inaccuracies, dispute them as soon as you can to the relevant agency.
By monitoring your credit report, you’ll stay ahead of what information gets delivered to your insurance agencies and lenders. This, in turn, helps you come out on top of any insurance-related or financial negotiations with these entities.
5. Apply For Loans Sparingly
Applying for multiple loans may seem like a one-way ticket to entering an infinite money glitch, but that’s not the case.
Each time you inquire about a potential loan deal within a short time period, it will be marked on your credit report and may decrease your score slightly. This is because multiple inquiries raise red flags to borrowers that you are in financial distress.
Not only does applying for multiple credit lines take a jab at your credit score, but it also puts you on the brink of debt disaster if you’re unable to pay back just a single one of those loans. In other words, it’s not financially smart to shoot multiple arrows in the hope of hitting the bullseye, so to speak.
Instead, be intentional and strategic when applying for loans—particularly if the applications will taint your credit report. This way, you’ll signal to insurance providers and future lenders that you’re in good financial control, making them more likely to give you a good deal for their product.
