How Credit Impacts Your Insurance Rates

It probably doesn’t come as a surprise to hear that your credit can have a big influence upon your financial life.

Planning to apply for a new auto loan, mortgage, or credit card? You probably already expect that your credit reports and scores will be consulted as part of your application.

Of course the condition of your credit can matter far more often than simply when you apply for new financing. In fact, your credit could even impact your insurance premiums and your ability to secure insurance coverage.

Do Insurance Companies Check Your Credit Score?

A credit report is largely a record which details your history managing financial obligations. Credit scores, on the other hand, are add-on products which evaluate the information contained in your credit reports and express your level of risk as a number.

Will an insurance company require a credit check whenever you apply for new coverage? The answer to that question depends upon a variety of factors. First and foremost, it depends upon the state where you live.

Certain states (e.g. California, Hawaii, and Massachusetts) either severely restrict or do not allow credit to be considered at all for insurance purposes. However, if no state restriction is present, federal law does permit credit reporting agencies to release your credit information for insurance underwriting (Fair Credit Reporting Act, 15 U.S.C. § 1681).

Whether or not an insurance provider will require an insurance credit check for new applicants also depends upon individual company policy. In general, most insurers do opt to check credit when permitted to do so by law. (Bestow typically uses credit during the underwriting process as well, but only considers the data behind your credit score and not your actual credit score itself.)

It is also worth noting that even if an insurance credit check (aka inquiry) occurs, it will not have a negative impact upon your credit scores. Furthermore, Experian explains that insurance inquiries are only visible on credit reports which you pull yourself, such as reports obtained through a credit monitoring site or AnnualCreditReport.com. They are not viewable on credit reports accessed by lenders or your creditors.

Why Do Insurance Companies Check Your Credit?

You may wonder why insurance companies consider your credit in the first place. The answer is risk prediction. Credit scores help others — lenders and insurance companies alike — to predict the risk of doing business with you.

The credit scores which lenders use and the scores used by insurance companies are not the same. Here is a breakdown of some key differences and similarities.

  • Both types of scores are based upon information found on your credit reports.
  • Lenders rely upon credit scores to predict the likelihood that an applicant will become at least 90 days late repaying a creditor within the next 24 months.
  • Credit-based insurance scores are designed to predict how likely you are to file a claim which would result in future losses for the insurer, according to FICO.

Credit-based insurance scores can be important when you apply for new coverage, but they are certainly not the only factor evaluated. Insurance underwriters consider a variety of other information as well, depending upon the type of coverage you are seeking.

Which Insurance Products Consider Credit?

Here are a few examples of the different types of insurance products which often consider credit as part of the underwriting process. Other important factors which could impact your premiums and your ability to secure coverage are included below.

Auto Insurance

When you apply for auto insurance, underwriters typically consider information such as:

  • Your Driving Record
  • Your Age
  • The Type of Vehicle You Drive
  • Previous Claims
  • Your Credit-Based Insurance Score

Home Insurance

Factors which could influence your homeowner’s premiums include:

  • The Age and Condition of Your Home
  • The Breed or Types of Pets You Own
  • The Replacement Cost of Your Home
  • Previous Claims
  • Your Credit-Based Insurance Score

Life Insurance

The following details may be considered when you apply for life insurance coverage:

  • Your Mortality Score (Custom Score Created by Life Insurance Companies)
  • Your Age and Gender
  • Your Medical History and Your Family Medical History
  • Your Health and Lifestyle
  • Previous Claims
  • Your Credit-Based Insurance Score (TransUnion’s TrueRisk® model is an example of the type of credit-based insurance score which might be used by a life insurance company.)

For more information about how life insurance companies specifically predict risk, click here.

Steps You Can Take to Improve Your Credit

The good news is that you have the right to check your credit reports any time to make sure that they are healthy and to confirm that the information contained in your reports is accurate. You are even entitled to a free credit report from Equifax, TransUnion, and Experian once every 12 months via AnnualCreditReport.com. If you discover errors or mistakes when you check your credit, you have the right to dispute those errors under the Fair Credit Reporting Act.

Paying down credit card debt can also potentially give your credit scores as boost. Non-profit credit counseling agencies, such as those certified by the National Foundation for Credit Counseling (NFCC), may be a helpful option if your credit card debt has gotten out of control.

The condition of your credit can impact everything from your monthly auto payment to your ability to land a job. When it comes to insurance, there is a chance that credit problems could make it more difficult or more expensive to secure coverage. In short, your credit matters.

Get started today and have coverage in a few easy steps