Why Your Credit Score Matters for Commercial Surety Bonds
Why Check Personal Credit?
Have you ever wondered why your credit score matters when applying for certain surety bonds? While many bonds can be instantly issued online, a bond's risk may necessitate a personal credit check. Surety companies, like Merchants Bonding Company, assess an applicant's personal credit to evaluate the likelihood of repayment if a claim arises, as surety bond premiums and rates assume no losses or full repayment of valid claims by the bondholder. Credit history provides insights into an applicant's financial responsibility and trustworthiness, which are critical in deciding whether to issue a surety bond.
Determining an applicant's or business owner's character is one of the most challenging aspects of underwriting commercial surety bonds. Sureties generally favor applicants who manage their financial affairs responsibly and demonstrate financial conservatism. Although each surety company has its own unique processes, similar principles guide their credit assessments. To understand why credit checks matter, it's important to first explore how surety bonds work.
How Do Surety Bonds Work?
A surety bond is a three-party agreement among the surety who underwrites the bond (e.g., Merchants Bonding Company), the principal (the bond purchaser), and the obligee (the entity requiring the bond). Bonds provide guarantees on commitments, ensuring financial and performance obligations are met.
What Does a Good Credit Score Indicate?
A strong credit score signals lower risk to surety companies, sometimes resulting in lower bond premiums for applicants. Understanding the impact of personal credit on surety decisions is crucial. Below are key factors influenced by a personal credit check:
- Risk Assessment: A higher credit score may suggest lower risk for the surety.
- Premium Rates: Some bonds may have tiered rates. In those situations, better credit scores result in lower premiums; poor scores increase premiums.
- Financial Responsibility: A higher score reflects responsible financial management and trustworthiness.
Why Do Surety Companies Check Personal Credit?
Surety bonds serve as financial guarantees, ensuring the principal fulfills their obligations. Below are common scenarios illustrating the importance of credit evaluations:
| Financial Guarantee Bonds |
| A business owner required to obtain a tax bond to guarantee payment of sales taxes must demonstrate strong financial standing. Poor credit or financial instability could suggest a higher risk of non-payment, which may affect the bond's approval or cost. |
| Fiduciary Bonds |
| These bonds guarantee that an individual will responsibly manage another person's assets or funds. Applicants with low credit may be declined, as their credit score may indicate challenges with personal financial management. |
| Large Bond Amounts |
| Higher bond amounts increase the surety's risk, necessitating a thorough credit review. |
| Increased Surety Exposure |
| Issuing multiple bonds for a principal heightens the surety's risk with each additional bond. |
Credit-Based Auto Decisions with Merchants' Hub
Merchants Bonding Company is a leader in surety technology. The award-winning Hub and Hub Express are online tools designed specifically by our in-house software developers to streamline surety bonding for agents and principals through features like credit-based automation. By entering applicant information and a Social Security number into the Hub or Hub Express, automated underwriting decisions are made instantly.
Merchants' Underwriting Process
At Merchants, we take a common sense approach to underwriting.
The majority of bonds can be issued online instantly or with an automated credit pull. Other bonds may necessitate a full underwrite, including analysis of various credit report elements to evaluate financial responsibility, including:
- Credit score
- Open accounts
- Length of credit history
- Prior bankruptcies, tax liens, judgments, or collections
- Charge-offs and foreclosure accounts
- Available credit and limits
- Past due-amounts and payment history
A common sense underwriting approach means we carefully evaluate all relevant factors, such as credit scores, personal and business financial statements, industry experience, and agent recommendations, to make balanced and fair decisions. We strive to go beyond numbers, considering the context behind credit histories to better serve our clients. When evaluating applicants, we take the following into account:
- Credit Score: Applications with strong credit histories are generally approved, while those with weaker credit are carefully reviewed to understand contributing factors.
- Industry Experience: Applicant's experience in their field plays a crucial role.
- Agent Perspectives: Input from agents familiar with the applicants provides valuable context and additional insight.
How Do I Get a Bond?
Merchants Bonding Company issues surety bonds through our network of appointed insurance agents across the country. Contact your local insurance agent or use our Find an Agent tool to begin the process. Your insurance agent will help you obtain your bond quickly and efficiently.
For more information, contact your Merchants underwriter.