Insurance And Your Credit Report (Part II)
The link between credit and insurance is not surprising when you think of it. Not only does the decision to buy insurance depend on your risk assessment, but insurers also have to take your credit report into account when pricing policies and preparing quotes for coverage.
This post explains how lenders use this information in their underwriting process, which information they consider, how this affects your rates and whether there are any exceptions for those with less-than-perfect credit scores.
How insurance rates are affected by credit scores
The most straightforward way to think about how your credit scores can influence your insurance rates is to consider only those with "good" and "excellent" credit, since these are the categories used by insurers to determine coverage limits and price premiums.
The impact can be substantial: the typical annual premium for a basic homeowner's policy is $1,500 or greater. However, carriers may offer policies that don't depend on credit scores as part of their underwriting process. (See "Issues that insurance doesn't count for" below.)
If you have either a "good" or an "excellent" credit score, your insurance costs may be 30% to 50% lower than those of similarly-situated insureds whose scores fall outside those ranges. This is because policies with good credit scores tend to offer higher limits, and the insurer can assume you're less likely to file claims.
On the other hand, if you have a history of paying bills late or there are other issues with your credit report (see below), insurance carriers might still use your credit rating to set their rates. Or they might combine information from your report with your past claim history when pricing a policy.
A few states have outlawed the use of credit reports in setting rates, but most state laws don't address this question, according to a study by the American Insurance Association.
What can go wrong if you have "poor" credit scores
If you have less-than-perfect credit scores (generally this means scores below 600), your insurance rates will be higher than those of insureds with strong records of on-time bill payments. Sometimes, they are significantly higher. For example:
This is because insurance companies assume that those with weak credit histories are more likely to file claims than those who don't have blemishes on their report.
This can be a significant factor in how rates are set for older drivers (who tend to have poorer credit scores) and those who live in urban areas, which tend to have higher crime rates. This is because insurers assume that those with poor credit are more likely to file claims following a theft or an accident.
Issues that insurance doesn't count for
Credit reports do not usually include information on:
These factors and others may be considered when setting your limits or determining your overall premium, but they are not used as the basis for pricing. So, if you fall into one of these categories and don't have other issues on your credit report (late payments, etc. ), you may find that your rates are lower than they would otherwise be.
Premiums can be lower if you have a relatively high credit score
Lenders might still consider your credit score when pricing the policies they offer. In this case, the rating is simply used to calculate your "base rate" for insurance coverage, which is used to determine the price of your premium. So, if you've got a decent credit score, and it's roughly in line with those for other insureds with similar profiles, you may be able to get a lower premium than would be expected given your history of paying on time.
Premiums can be lower if you have a bad credit score
If you have a "poor" credit score, your rates will not always be higher than those of insureds with perfect scores. For example:
Your rate could be higher than they would be otherwise because you have other issues on your report (late payments, etc.). Or it might not change because the coverage limits offered by your insurer are less than they might be if your history were considered "good."
So, is there an area where you're going to find that having a poor credit score actually works to your advantage? Yes: for owners of rental properties, whose property-damage insurance may depend on the value of their dwellings as assessed by an insurance company. Owners of small rental properties may want to contact their insurance providers to see if they can get coverage at the maximum limits without it counting against their credit scores.
In summary, your credit score can affect your insurance rates in ways that are both favorable and unfavorable. However, the impact of these factors is not always predictable. So study your options carefully before moving forward with any coverage decision.
We hope you found this post helpful! If so, please also take a minute to register for a free roadside assistance membership or secure an auto insurance quote from one of our recommended companies. Your feedback is greatly appreciated!
Source: "Insurance And Your Credit Report (Part II)", FREE DOWNLOAD from CreditSesame .
More on Insurance:
Insurance Tips for New Drivers | Smart Moves, Inc.
How to Get Discounted Auto Insurance Rates | Smart Moves, Inc.
What You Need To Know When Buying Insurance | Smart Moves, Inc.
Additional Resources:
Disclaimer: The content on this site is provided for informational purposes only and is not intended as a substitute for the advice provided by your insurance agent. It does not constitute or replace professional advice and should not be relied upon during any medical emergency or personal crisis. The information on this site should not be relied upon to determine the course of treatment for any individual or health problems. Always consult with a trusted healthcare professional familiar with your specific health needs before making any decisions.
Reference: "Insurance, Credit Scores and Your Premium", June, 2011, Creditcards.com
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Conclusion: Is Your Credit Score Affecting Your Insurance Rates?
So, is your credit score affecting your insurance rates? Maybe, but maybe not. It depends on your past payment history and the policy conditions being used to set your premium.
Your credit score can certainly affect how much you pay for an auto insurance policy, as well as what kind of coverage you get. This might be a good thing if it means that you're getting a lower rate on a car insurance policy than someone with a perfect driving record. However, if lowering your premium was the only reason why you wanted this insurance (or any other), you probably wouldn't be reaching out for help on this site.