Does Changing Insurance Affect Credit?
Does changing insurance affect your credit score? Get clear answers on direct impacts, subtle connections, and what truly influences your financial standing.
Many individuals wonder if changing their insurance coverage might impact their credit standing. This article clarifies the relationship between insurance activities, particularly changes in coverage, and your credit score, distinguishing between direct and indirect effects.
Direct Impact of Changing Insurance on Credit Scores
Shopping for new insurance or switching providers involves a “soft inquiry” or “soft pull” on your credit report. Insurance companies use these soft inquiries for quoting purposes. Unlike “hard inquiries” for credit applications like loans or credit cards, a soft inquiry does not negatively affect your traditional credit score, such as a FICO Score. Obtaining multiple insurance quotes within a short timeframe will not harm your credit score.
Regular, on-time payments for insurance premiums do not build your credit history because insurance companies do not report them to major credit bureaus. An isolated late payment on your insurance premium will not directly harm your credit score, as these payments are not reported unless they escalate to severe delinquency. Canceling an insurance policy also has no direct impact on your credit score, provided all outstanding premiums have been settled.
How Insurance Companies Use Credit Information
Insurance companies use credit information to assess risk and determine policy premiums. They believe a statistical correlation exists between an individual’s financial responsibility, as reflected in their credit history, and the likelihood of them filing insurance claims. This practice is permissible under federal law, specifically the Fair Credit Reporting Act (FCRA).
Insurers use “credit-based insurance scores,” which differ from standard credit scores used by lenders. These specialized scores predict the probability of an individual filing an insurance claim, rather than their likelihood of defaulting on a loan payment. Common factors influencing these scores include payment history, outstanding debt, the length of credit history, recent credit applications, and the mix of credit accounts. A higher credit-based insurance score indicates lower risk and can lead to more favorable premium rates.
Situations Where Insurance Could Indirectly Affect Credit
While changing insurance or getting quotes does not directly impact your credit score, certain financial behaviors related to insurance can have indirect negative consequences. The most significant scenario involves unpaid insurance premiums that become severely delinquent. If an insurance company is unable to collect overdue premiums, they may send the unpaid debt to a collections agency.
Once an account is placed with a collections agency, this negative entry can appear on your credit report and substantially lower your credit score. Collection accounts can remain on your credit report for up to seven years from the date of the initial delinquency. This impact on credit is a result of financial mismanagement and the failure to pay a debt, not the act of changing insurance coverage itself. If non-payment of an insurance-related debt leads to a civil court judgment, this can still negatively influence your overall financial standing and future borrowing ability.