A strong credit score isn’t just beneficial when you apply for a loan or credit card. Your credit can affect many other aspects of your life, possibly including where you live, the car your drive and even how much you pay for insurance. That’s right: your credit score can affect how much it costs to insure your car, home, life and more.
Insurers can look at your credit because they may consider poor credit a risk factor that increases your chances of filing a claim. They use the information in your credit report (among other risk factors) to generate a credit-based insurance score that helps determine your monthly premiums. Here’s how it works:
What is a Credit-Based Insurance Score?
Before insurance companies cover a new policyholder, they go through a process called underwriting. During this process, they evaluate a person’s risk levels to determine whether it will be profitable to insure their life or property.
For instance, an auto insurer may check your driving history, including how many accidents you’ve been in and how many moving violations you’ve had, to determine how likely you are to file a claim in the future.
Many insurers also check a potential new policyholder’s credit report to generate a credit-based insurance score. This score is different from a traditional credit score, but it uses many of the same factors that lenders use to determine risk. There are many credit-based insurance scoring models available, including from heavy hitters such as FICO® Scores.
Credit-based insurance scoring is a widespread practice. Fair Isaac Corp. says 95% of auto insurance companies and 85% of homeowners’ insurance companies use credit-based insurance scores during the underwriting process in states where it’s legal (some states don’t allow credit-based insurance scoring for certain policy types).
To arrive at your score, insurers look at your risk factors and information on your credit report including your current and past debts, payments and more. For example, Progressive considers payment history and available credit balances during the underwriting process. Negative items such as past due payments, accounts in collections and high credit usage may negatively affect your score.
How Your Credit-Based Insurance Score Affects Your Premiums
If your credit-based insurance score is too low and you have high risk factors in other areas, insurers can deny your policy outright. They also may charge you higher premiums to make up for the additional perceived risk.
According to a report from Consumer Reports, the difference between a “good” and “excellent” credit score could mean hundreds of dollars per year in insurance premiums. A poor credit score could add an average of $1,301 to a driver’s premium annually.
Some states don’t allow insurers to determine premiums based on credit report, but the majority of them do. When shopping around for insurance, you should check your state’s laws. In many cases, having a strong credit score and a lack of negative items on your credit report can save you money on your insurance.