How Credit Score Affects Bond Costs

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If you check out all the different types of surety bonds that we offer, you’d quickly notice that there’s a single factor shared by all when it comes to bond cost: credit score.

You’ll see statements like “If you have a stellar credit score, you will be eligible for a low bond premium” and “If you have an excellent credit score, you will be eligible to pay for a low bond premium or as low as 1% of the bond amount”.

credit score

The wording may change, but the essence of the message stays the same. Credit score does affect your bond cost or bond premium.

Actually, it doesn’t just affect your bond cost; it is the biggest determining factor in obtaining the best bond cost possible.

In order to better understand the “how”, let’s first delve into the “why”.

 

Why does credit score affect your bond premium?

Because surety bonds are credit transactions. A surety extends credit to those who need it.

But keep in mind that the nature of every underwriting process is to avoid losses. That’s why before a surety can extend its credit, the principal (to whom credit is extended) must show solid proof that he or she will fulfill the bond’s obligations.

And the best indicator of that is a good credit history. It only means that the principal has the ability to diligently pay his or her bills on time.

When the bond’s principal shows that he or she doesn’t fall behind on his or her obligations, it gives the surety the confidence to move forward with the application.

 

How your credit score affects your bond cost

It’s no secret that having a good credit score can open multiple wonders for those who have it. A fantastic credit profile can pave way to building wealth and acquiring financial power.

Better interest rates when taking out a business loan, paying for credit cards, car loans, or home mortgages. And you’ll get better bond costs, too.

A good credit score doesn’t just mean that the principal has the financial capability to pay on time and in full.

More importantly, it’s a telltale sign that the principal has the discipline to fulfill his or her obligations. And that is what a surety is looking for.

Can this person be trusted? If so, what are the proofs that he can be trusted?

Those are some of the questions that a surety seeks answers for. A person’s credit score is one of the biggest answers to those. The risk for that kind of person is lower. In other words, he or she can be trusted.

Because remember that the primary purpose of securing a surety bond is to assure the obligee (beneficiary of the bond) that the principal will accomplish all his duties.

There are a number of ways in which a surety can check an applicant’s credit score. Some of these are as follows:

  • Financing statement from banks
  • Interest rate being charged
  • Company’s historical financial information
  • Report provided by third-party credit agencies

 

Bad credit score vs good credit score

The average FICO score in 2018 is 695 – which is considered to be fair. Lower than 620 is a bad score, 620-649 is poor, 650-699 is fair, 700-749 is good, and 750 and over is excellent.

We here at Surety Bond Authority consider that as great news because we want to provide the best bond cost for our clients. And having that kind of credit score will definitely give them an edge.

Those who possess that kind of score will be eligible to lower their bond costs to just 1% of the bond amount.

For example, a Competitive Local Exchange Service Bond’s amount is $50,000. If the principal has a FICO score of 695, he or she will be eligible to pay just 1% of that amount as bond cost or bond premium – which is $500.

Now if the principal has a credit score of 580, his or her bond cost will immediately go up to more than $5,000.

That’s a huge jump, right? The reason for such is simply because the surety will be exposed to higher risks.

Having a good credit score will help any person in getting the best bond cost possible. However, a bad credit score shouldn’t deter you from getting a bond from us. You may still qualify.

We have streamlined our process so that those who have less than good credit scores will still get a chance to be bonded.

Our surety bond process will also make it easier and faster to obtain a surety bond. Talk to us for more information!

 

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