How Your Credit Score Affects Insurance Premiums
June 28, 2018
A poor credit score makes your financial life difficult in a number of ways. You receive poorer interest rates and terms on credit cards, it’s harder to qualify for mortgages, and, “When it comes time to get insurance, maybe your insurance premiums will be a little more expensive because you have a low credit score,” says Millennial Money Expert Stefanie O’Connell.
Why would credit affect your insurance premiums? Insurers have to determine the premiums you pay based on the collective risk factors for that particular field. Greg McBride, Chief Financial Officer of Bankrate.com, includes insurance companies in this assessment: “They’re looking for ways to evaluate your risk, and creditworthiness is one of those metrics.”
Insurance companies typically don’t use your credit score directly, but they may incorporate your credit score and other relevant aspects of your credit history into a credit-based insurance score – an analogue that focuses not just on the ability to pay premiums but also on other behavioral risk factors that make you more likely to file a claim.
There are some limitations – for example, state law prohibits credit-based scoring for auto insurance in Hawaii, California, and Massachusetts, and credit-based scoring for homeowner’s insurance in California, Massachusetts, and Maryland – but insurers will take relevant parts of your credit history into account whenever they are allowed to do so.
Each division of the insurance industry will apply credit data in ways that are most relevant to their particular segment. For example, your credit score will not affect your ability to qualify for life insurance, but it may affect the premiums that you pay. Stronger negative credit events such as an active bankruptcy proceeding may keep you from qualifying for insurance at all. You can get free life insurance quotes and apply for your top choice in minutes using our Life Insurance Quote Comparison Tool.
Where it’s allowed, credit-based insurance scoring can affect homeowner’s insurance significantly, according to a study by InsuranceQuotes.com. Poor credit results in a near doubling of premiums compared to consumers with excellent credit, while fair credit warrants a 32% increase.
Credit scores don’t always directly affect health insurance, although high-risk lifestyle factors or conditions may lead to higher premiums. Generally, health insurers just want to make sure that you can pay those premiums. If you have employer-based health coverage, that concern goes away since your premiums are paid through deductions made by your employer.
Auto insurers can refer to separate studies by the University of Texas and the Federal Trade Commission that show a correlation between credit-based insurance scoring and risk of paying out significant claims. As a result, credit scores are part of the mechanism for setting auto premiums everywhere that state law allows. Percentage increases are similar to those for life insurance.
Strangely, even responsible behavior can lead to a lower credit score and the subsequent insurance effects. Gerri Detweiler, Head of Market Education at Nav, relates the story of her fiscally responsible father who found his insurance rates affected by a lower credit score. Detweiler explains, “It wasn’t because he doesn’t pay his bills on time – it’s just that he doesn’t have much credit.”
If you aren’t currently using much credit, the credit bureaus have little to go on in assessing your current risk. You may have used credit responsibly in the past, but insurers can’t determine if your situation has changed without further information. Low credit usage could be from either lack of needing credit or lack of ability to pay back credit.
We’re not suggesting irresponsible spending – we just suggest that you keep a running but manageable amount of credit that you pay off regularly each month and in full. This shows insurers another aspect of your life where you can prove responsible behavior through your actions.
In short, your credit score does play at least an indirect role in your insurance premiums. You won’t overcome a propensity for fender benders or a career on the police bomb squad with a good credit score – but every little bit helps.
You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.