How Your Credit Score Can Affect the Cost of Your Insurance

Apr 2, 2019

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You’ve heard it before and you’ll hear it again: Good credit is important. You also probably know that you need good or excellent credit to qualify for attractive credit cards and loans. But you might not realize that the condition of your credit can affect many other areas of your financial life as well, including the cost of insurance.

Lenders aren’t the only ones who care about your credit. Insurance companies commonly check credit as well. In fact in most states (except California, Hawaii and Massachusetts), your credit score could have a big impact on the price you pay for automobile and home insurance coverage.

(Photo by Sturti/Getty Images)
A high credit score can score you a lower home insurance cost . (Photo by Sturti/Getty Images)

Why Do Insurance Companies Care About Credit Scores?

Auto and property insurance companies care about credit for the same reason lenders do — it helps predict risk. And lower risk equals bigger profits.

Lenders use traditional credit scores to predict the likelihood that you will be 90 days late on a credit obligation within 24 months. Credit scores help lenders decide who they want to accept as a new customer, and in the case of a loan, how much to charge in interest.

In most states, insurance providers also use credit scores to predict risk. However, insurance companies aren’t trying to figure out the probability that you’ll pay your premiums late.

Rather, insurance companies use credit scores to predict how likely you are to file claims, which cost insurance companies money. By reviewing the credit of new applicants, insurance providers can reduce the risk of taking on customers who will cause the company to take a loss.

If your state law allows it, credit-based insurance scores can be used to:

  • Set the price of your insurance premiums
  • Determine whether an insurance company wants to do business with you

A Different Type of Score

Credit-based insurance scores are not the same as the credit scores used by lenders. They’re also different from the free credit scores you might see online or from your credit card issuer. Traditional credit scores and credit-based insurance scores are both based on information found in your credit reports from Equifax, TransUnion and Experian.

Most traditional credit scores stop with the information on your credit reports (with a few exceptions). Insurance scores consider more. Credit-based insurance scores use an algorithm that considers information from both your credit reports and your previous insurance claim history.

Figuring out your credit score for free these days is a simple process. (Photo by Maskot/Getty Images)
You have many options for checking your credit score for free these days. (Photo by Maskot/Getty Images)

How Much Money Could Good Credit Save You?

There is a positive side to credit-based insurance scores. If you work hard to earn and keep good credit, you could possibly enjoy cheaper auto and property insurance.

Wondering just how much you could save? You could pay an average of almost 40% more in auto insurance premiums if you have fair credit, according to InsuranceQuotes. That means a $1,000 premium for an applicant with excellent credit could go up to $1,390 if you only have fair credit.

The cost is even steeper for auto insurance for applicants with poor credit. It will cost more than double. The average auto premium increase in the US jumps a painful 103.5% if you have poor credit. This means a $1,000 annual premium with excellent credit translates to a $2,035 premium for those in the poor credit bracket. Some cities are worse than others. In Michigan, drivers with poor credit pay an average of 229% more for insurance coverage.

You could easily pay less than half price for auto insurance coverage (with even better savings in some states) if your credit is stellar shape, according to the insurance quote website.

Another Reason to Pay Attention to Your Credit

The use of credit-based insurance scores may be more common than you think. According to the Nationwide Mutual Insurance Company, 92% of insurers will consider your credit when calculating auto insurance premiums.

Here’s the bottom line: Your credit report can have a big impact on both your finances and your life. It will affect your ability to take out a credit card, borrow money, finance a car and put a roof over your family’s head. The fact that good credit could save you money on insurance premiums is just one more reason why you need to pay attention to your credit reports and scores.

Having good insurance can help cover your home and vehicle when it comes to natural disasters. (Photo by JenniferPhotographyImaging/Getty Images)
Having a good credit score, and therefore good insurance, can help cover your home and vehicle when it comes to natural disasters. (Photo by JenniferPhotographyImaging/Getty Images)

If you’re not already in the habit of doing so, it’s a good idea to check your three credit reports often. When you keep a close eye on them, you can react quickly if any problems come up. You have the right to claim a free report from all three credit bureaus once every 12 months at AnnualCreditReport.com, but that’s not nearly enough. You should ideally review all three of your credit reports every month when you check your credit card and bank account statements.

For more information, see 18 Ways to Check Your Credit Score for Absolutely Free.

Featured photo by Maskot/Getty Images.

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