Does Insurance Run Your Credit and Impact Your Rates?
Unpack the link between your financial responsibility, credit evaluations by insurers, and the resulting impact on your insurance premiums.
Insurance companies commonly use credit information to determine insurance rates. This practice is widespread across various policy types, influencing how much individuals pay for coverage. Understanding this practice helps consumers navigate the insurance landscape more effectively.
When Insurance Companies Use Credit Information
Insurance providers use credit information for risk assessment when underwriting policies. This applies to common insurance types, including auto, homeowners, and renters insurance. This practice stems from a statistical correlation between an individual’s financial responsibility, as shown by their credit history, and the likelihood of future claims or timely premium payments.
This approach is a standard industry practice, often subject to state-level regulation. While many personal lines of insurance utilize credit data, health insurance policies typically do not consider credit information. Insurers believe that consumers who demonstrate greater financial responsibility tend to have fewer and less costly losses.
Understanding Insurance Scores
An “insurance score” is a numerical rating developed by insurance companies to predict the likelihood of an individual filing an insurance claim. This score is distinct from a traditional FICO credit score, which lenders use to assess creditworthiness for loans. Insurance scores are used exclusively by insurance companies for risk evaluation. Though separate, they are derived from an individual’s credit report.
Factors considered when calculating an insurance score include:
Payment history (how consistently bills are paid on time)
Outstanding debt (amount owed compared to available credit)
Length of credit history
Recent applications for new credit
Mix of credit types (e.g., credit cards, mortgages, auto loans)
Payment history usually carries the most weight, often around 40% of the score. These scores generally reflect indicators of financial responsibility, though specific algorithms vary by insurer.
Impact on Insurance Costs
An individual’s insurance score directly influences the cost of their insurance premiums. A higher insurance score generally indicates a lower risk to the insurer, which typically translates into lower premiums. Conversely, a lower insurance score can result in higher premiums due to the perceived increased risk. Some studies suggest that drivers with lower credit scores can pay significantly more for the same auto insurance coverage.
Beyond premiums, an insurance score can also affect eligibility for certain policies or available discounts. Credit information is only one of many factors insurers consider when setting rates. Other elements that determine insurance costs include:
Driving records
Claims history
Location
Type of vehicle
Age of the policyholder
Credit Inquiries and Your Credit Report
When an insurance company checks credit information, they typically perform a “soft inquiry,” also known as a soft pull. This type of inquiry occurs when a company reviews limited credit information, often for screening purposes or promotional offers. Soft inquiries do not affect an individual’s credit score and are usually only visible to the person checking their own credit report.
In contrast, a “hard inquiry” occurs when a lender accesses a credit report as part of a formal application for new credit, such as a mortgage or car loan. Hard inquiries can temporarily lower a credit score by a few points and remain on a credit report for up to two years. Since insurance companies use soft inquiries, obtaining insurance quotes generally does not negatively impact a person’s credit score.
Managing Your Credit for Insurance
Maintaining good credit health can indirectly benefit insurance rates. Paying bills on time is a significant factor, as payment history carries substantial weight in insurance score calculations. Consistently making timely payments demonstrates financial responsibility.
Keeping credit utilization low (using a small percentage of available credit) can also positively impact credit health. Regularly checking credit reports for errors and disputing any inaccuracies is another beneficial practice. Avoiding unnecessary new credit applications helps prevent multiple hard inquiries, which, while not affecting insurance scores directly, are part of overall credit management.