Loan approvals, revolving credit accounts, mortgages – these are what people usually think about when they worry about how their credit scores might factor into things. But your credit history can impact your life in more ways than you think. Your insurance costs are just one major example.
Insurance providers often consider your credit when setting premiums for car insurance, homeowners policies, and much more. Let’s dive into what you need to know.
How Insurance Companies Use Credit Scores
The best way to predict a person’s future behavior is to take a look at how they’ve behaved in similar past situations. That said, your credit score tells an insurance provider a lot about you, including the likelihood of you ever filing a claim in the future.
These factors are used in what’s known as a credit-based insurance score. This score is separate from the one lenders and other creditors use, but similar as far as how it’s determined in the first place.
Why creditworthiness matters to insurers
Providers settle on the insurance premiums they charge by assessing risk, and they use statistics and real-world data to do this. Years of research have uncovered a connection between a person’s credit history and how likely they are to ever file an insurance claim.
Generally speaking, people with higher credit scores represent less of a risk and are more likely to pay their insurance premiums on time, which translates to lower overall rates. Details that can affect a credit-based insurance score include:
- Credit history length
- Payment history
- Size of outstanding debt
- Number of new credit inquiries
- Types of credit used
Personal info – like race, income, or employment history – does not factor into this score.
Which types of insurance use credit scores?
The insurance types most likely to look at credit scores to determine premiums include the following examples:
- Auto insurance: This is one of the most common insurance types to factors credit history into the decision-making process.
- Homeowners insurance: Most providers will look at your credit to decide how much you should pay to cover your home and belongings. This can sometimes also be the case with renter’s insurance.
- Life insurance: Although some companies may look at your credit, it’s less common with life insurance.
In most cases, your credit score won’t affect disability insurance or SSDI eligibility.
The Impact of Credit Scores on Insurance Rates
Curious how your current credit tier might affect your insurance rate? Here’s a quick breakdown of how things typically shake out:
- Excellent credit (750+): Eligible for the best rates and most desirable premiums
- Good credit (700-749): Still highly eligible for excellent pricing and rates
- Fair credit (650-699): Likely to pay increased premiums
- Poor credit (under 650): Very likely to face high rates and increased scrutiny
With some types of insurance (e.g., auto insurance), policyholders with poor credit can wind up paying significantly more for coverage than those with excellent credit – possibly even twice as much. However, poor or fair credit doesn’t disqualify you from insurance coverage altogether.
Additional factors that may affect insurance rates include driving record, location, age, and marital status. Safety features and other risk factors can also play a role.
Legal Considerations Surrounding Credit-Related Pricing
Although credit-based insurance pricing is perfectly legal in the majority of US states, it’s also regulated. Here’s a look at what to consider.
Fair Credit Reporting Act (FCRA)
Under the FCRA, potential insurers are required to disclose whether they used your credit history to arrive at a pricing decision. They also must provide you with a copy of the information used, as well as give you a chance to dispute any inaccuracies.
State-specific regulations
States that prohibit credit impact on auto insurance rates include Massachusetts, California, and Hawaii. Additional states may impose restrictions on potential credit impact, either in general or within certain contexts.
Always check laws and regulations in your state to determine how your score may affect your premiums, or seek out a professional for guidance.
Alternatives to Credit-Based Pricing
If you’re worried about how your credit score might affect your insurance, know that there are ways to work around it. While it’s true that most major insurance providers do consider credit to at least some extent, it’s not all that counts. (Remember, driving habits, behavior, and other factors figure into things, as well.)
For example, usage-based insurance programs (UBIs) reward drivers for excellent records, regardless of their credit situation. You can also ask agents direct questions regarding their evaluation policies when shopping around for options. Here are some examples:
- Do you use credit scores to set your rates?
- Do you offer any alternative pricing models?
- Are there other discounts I might qualify for?
Making Informed Insurance Choices
Ultimately, credit scores don’t just impact overall financial health. They aren’t the only factor affecting your insurance rates, but they’re still a powerful one, especially when it comes to auto insurance and homeowners insurance.
Raise your chances of securing optimal rates by taking the time to shop around for the right provider, exploring alternatives (like UBI), and knowing your rights under the FCRA. Enlisting the help of professional financial experts like the ones you’ll meet at MyStages® is also recommended. Contact us today to schedule a consultation!
