Why having a bad credit score means you pay more

All credit users have what is referred to as a credit score which is based on ‘individual risk levels’. Risk levels are mainly assessed on past credit usage and adherence to repayment terms. For example, by paying your accounts on time your credit score will indicate that you are a ‘low risk level’, which will assist you in building a good credit score. If however, you start slipping behind in repayments then you will be scored as ‘high risk’.


You may think that having a bad credit score (ITC record) only means that you will find it difficult or nigh on impossible to get credit. But there are further disadvantages to having a bad score. A bad credit record could also mean that you pay more for other financial products such as insurance.


“If your ITC score is bad or not favourable then companies can increase the insurance premiums they quote to you. Not all companies do this – it differs from company to company. Insurers could also reject you as a client as they deem you to be too high a risk,” explains Santie Stevens, short term insurance manager at InsuranceBusters.


Why will scores impact premiums?
One of the biggest insurers, Santam, says it factors client’s credit score in when it calculates premiums. Marius Neethling, personal lines underwriting manager at Santam, says: “Short-term insurance premiums are risk based, meaning that a client's premium is based on the risk that the insurer perceives the client to have. Rating factors are used by the insurer to estimate this risk. Credit scoring is one of these factors.  Generally, clients with better credit histories tend to experience lower claims costs.”


Neethling does admit that not all poorer credit scored clients are always poorer risks but adds: “Pricing works on the law of averages, which means that all else being equal over a large sample, the claims costs of clients with a good credit history should pay lower premiums as they will have lower claims costs. As time progresses and the insurer builds up history of the client, the credit score should play less of a role in the price as the insurer can base the client's premium on actual experience.”


He advises that it is still possible to do certain things to reduce premiums. “Clients who wish to reduce their premiums may elect to participate in telematics offerings to prove their behaviour is better than average or select higher excesses to reduce the insurers risk.”


Apply for loans the right way
Johan Maree, CEO at FNB Credit Card says that if you have a good credit score you should make sure when applying for credit that your service provider prices your credit based on ‘individual risk levels’, and not a generic model or a ‘one size fits all approach’. “This [one size fits all approach] would result in you paying more to compensate for their high risk users.”


Maree says an example of risk based pricing is personalised interest rates. “Banks price their loans based on individual risk levels and as such if you have a good credit score you could potentially get access to lower interest rates.”


Ultimately, having a poor credit score leads to many disadvantages. You could end up paying more for insurance or be rejected as a client by an insurer all together. If you do have a poor record, it’s best to get expert help says Stevens: “Phone an insurance broker who can get quotes on your behalf. They will know which companies factor in credit scores when it comes to premiums. Don’t do the shopping on your own as you won’t know if the insurer is factoring your credit score into the premium.”  


Having a bad credit score or being under debt review also means you won’t be given further credit or, if you do, you won’t get it at a favourable rate. “In these instances some customers are forced to seek credit in the informal sector which often results in people paying a lot more for their loan. We urge customers not to follow this often costly route,” says Maree.