Like It or Not: Credit Ratings Can Affect Insurance Rates

At a time when economic uncertainty, a sluggish housing market, and unemployment concerns have caused more families to struggle financially, some people might be surprised to learn that an eroding credit history can also cause a rise in their auto and homeowners insurance premiums.

Consumers’ credit records may be as important as their motor vehicle records, property inspections, and other risk factors when it comes to securing affordable insurance. Many insurance companies now rely heavily on the data compiled in credit reports to determine whether they want to insure a customer and what that coverage will cost.

It is important for consumers to be aware of their own credit situations even if they don’t intend to borrow money any time soon. Here’s a look at the mysterious practice of utilizing credit data to price insurance policies.

Keeping Score

Insurers have long counted on statistics to help calculate insurance premiums for customers. Traditionally, factors such as age, sex, marital status, ZIP code, and driving record have been worked into equations that predict the likelihood of a payout and a relevant price for insurance.

Now the insurance industry also considers some parts of an individual’s credit history to make sure he or she pays a rate that more closely corresponds to the level of risk represented. In fact, a recent Federal Trade Commission study showed that there is a correlation between insurance scores and the likelihood that individuals will file insurance claims.¹

Many insurers do not use scores exactly as they are reported by the major credit reporting agencies, but rather plug the data into their own models in an attempt to quantify risk. The proprietary insurance scores that result can differ greatly from company to company, and the formulas are not typically disclosed to the public.

The extent to which each individual company considers insurance scores compared to other factors — like a customer’s actual driving record or accident history — can also vary greatly. A few states have enacted laws that restrict or ban some factors from being used and provide more consumer protections.²

Keep Credit in Check

The reality is that some people will pay more for their insurance when their credit histories become a factor. On the other hand, those with spotless records will pay less. Therefore, making the effort to keep up your stellar rating or improve on a blemished one could pay off in the form of lower insurance premiums.

Consider the following tips to help maintain your good credit ... and your insurability.

• Credit reports have been known to include errors that can cause unnecessary damage to your credit rating. Take the time to view your own credit report at least annually and strive to have any errors removed as quickly as possible.
• Pay bills on time and don’t make too many requests for new credit in a short period of time.
• Keep credit-card balances low relative to your total credit limit.

Depending on where you live, you may be affected by the industry’s insurance scoring practices. Your insurance agent may be able to offer more specific information on whether credit is used to determine pricing in your state and what you can do personally to get the most competitive rates for your auto and homeowners insurance.

1–2) Insurance Information Institute, 2009

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2010 Emerald.