We all know that our credit scores are very important when it comes to a number of financial activities, like applying for loans, making large purchases, applying for a mortgage, and opening up a new bank account. Your credit score can also influence the amount of money you pay for your insurance policy premiums. Your insurance rates may not be calculated with your credit score in mind, but the premium you pay every month or every year certainly is.
Insurance companies have a specialized equation they use to determine your credit score and how much they can charge for a premium on the insurance policies you have or want to buy. This score measures how credit worthy you are, and businesses often use this number to calculate how likely you are to pay back the money you owe. Insurance companies use this number slightly differently; they use it to determine how likely you are to file an insurance claim.
Credit Score and Insurance Rates
Insurance companies may charge higher premiums to policyholders with lower credit scores because they equate having a low score with being more likely to file an insurance claim. The premium that you will be charged is going to be different depending on the state you live in and your individual credit score. Individuals with auto insurance policies found that, even without any accidents on record, a lower credit score could mean paying between $68 and $526 more every year compared to drivers with great credit scores (see The Top 5 Factors That Affect Your Auto Insurance Premiums to find out what else influences your rate).
Insurance companies also adjust your premium based on your history. If you have had an accident or any other car-related violation, your auto insurance premium will likely be higher because you have become riskier to insure.
Insurance companies are not under any obligation to disclose how they arrive at their credit score evaluations, and policyholders may not know that their credit score could affect their insurance policy premiums, either.
California, Hawaii, and Massachusetts are the only states that don't allow insurance companies to use policyholders’ credit scores to influence the price of their insurance premium. Some states do allow insurance policy holders to petition their insurance companies for something called an extraordinary life circumstances exception, which takes into account
- Family emergencies
- Divorce (although no longer available, learn about divorce insurance and other Strange Insurance You Probably Don't Need)
- Illness (learn The Basics of Critical Illness Insurance)
- Identity theft (considering insuring against this? Read Identity Theft Insurance: Is it Worth the Price? first)
and other scenarios that would negatively affect a person’s credit score. This keeps the insurance company from using your credit score against you when your low credit score isn't a marker of irresponsible behavior.
How Credit Score Affects Insurance
Other kinds of insurance can also be influenced by your credit score. Car insurance is perhaps where policyholders will find the most predominant use of credit score to determine the cost of an insurance premium, but other kinds of insurance take this information into account as well.
- Homeowners insurance is one area where credit score does matter. Credit score matters in nearly every aspect of buying a home, from applying for a home loan to taking out a mortgage. Credit score is of the utmost importance in this area because there are a lot of different insurance claims that can be associated with owning a home (to get an idea of what kind of claims are possible, see Breaking Down Your Homeowners Insurance Policy, from Coverage A to E). The insurance risks that exist when you buy a home are much higher than they are with a vehicle, for instance, and the cost of repairs is much higher, too.
- Homeowners with only good credit can pay up to 32% more than those with great credit when it comes to their home insurance policy premiums. In the case of homeowners insurance, California, Hawaii, and Maryland are the three states that don't allow home insurers to use credit score to determine premium costs.
- Health insurance is the insurance industry that is the least likely to use your credit score to determine your premium; they are more concerned with keeping you healthy and out of the hospital.
- When it comes to life insurance, the longer you pay your premiums the better it is for the insurance company. Some life insurance companies will actually give more benefits for people who pay their premiums on time and have a good credit score, rather than punish those who don't (learn What Influences Life Insurance Premiums).
Working with Credit Score
Although credit scores are used to determine insurance premiums, they don't have to lock you into high premiums permanently. There are ways to improve your score and lower your premium. Paying off your credit card debt slowly and surely can raise your rate, as can consolidating your debt and not opening any new lines of credit. A financial counselor can look at your credit score to determine how it could improve, and an insurance expert could help you see where your credit score may be increasing your insurance premiums across your policies (see Insurance Agents: What's the Point? to learn more).