Why Are Surety Bonds Based On Personal Credit?

Credit score is a vital metric used inside the surety bond application process to allow underwriters to gauge the likelihood of applicants paying back a bond claim. This article gets into the importance of credit scores in the surety bond process and the relation between credit scores and bond rates. 

Surety Bonds Explained

Surety bonds are a three-party requirement between a principal, an obligee, and a surety company. The bond, provided by the surety company, offers a guarantee to the obligee (regulatory entity) or anyone else that is financially harmed by a principal’s (bondholder’s) failure to meet their obligations that recompense is available upon a valid claim. 

Credit history is taken into account during the bond application because although surety claims are paid out by the surety company (Jet), the principal is required to pay the surety company back in full for the claim made against them. This is unlike traditional insurance, which pays out for accidents—claims on surety bonds are caused by avoidable actions caused by negligence or fraud.

Credit Scores to Determine Surety Bond Rates

Credit scores, ranging from 350 to 850, are a quantitative analysis of a person's financial status. While many factors determine the surety bond cost, such as bond limit, years of experience, and bond type, the credit score is the most comprehensive. 

When someone has a high credit score, it shows they manage money well and make payments in a timely manner, allowing them to obtain a lower surety bond rate. On the other hand, if someone has a lower credit score, they would be quoted a higher bond premium (price). 

When filling out the application, the principal will be asked to input their social security number for a soft credit check. A common question that many applicants ask is does the credit check affect my score? The answer is no—surety companies perform what is called a soft credit check, which does not affect customers’ credit scores.

Jet Insurance Company, along with most of the surety industry, runs credit checks through Experian. If your credit is frozen, you’ll need to unfreeze it with Experian, which can be done in under 24 hours.

How Much Do Surety Bonds Cost?

The premium (or bond price) is only a small percentage of the total bond limit. For example, the cost of a $20,000 bond may start at 0.5%, or $100. This, of course, depends greatly on the risk of the bond, the credit score, and several other factors. The bond limit is the maximum amount a claim (or multiple claims in conjunction) can be filed for through the surety bond and paid out by the surety company.

Surety bonds that have low limits and carry less risk can often be instantly issued—no credit check required. However, most types of bonds, including license bonds, contract bonds, notary bonds, probate bonds, court bonds, and more will require a soft credit check.

By checking the financial health of the applicant, the surety company can determine the chance that the applicant will pay back a claim.

For large-limit and high-risk bonds, additional financial statement review may be requested. At Jet, most surety bonds can be applied for and purchased in minutes, even when a credit check is necessary. 

Jet is here to help you get a bond as quickly and affordably as possible. Have additional questions or want to get a quote? Give us a call at 855-296-2663 or click the button below to get started.