How Does Credit Affect Your Insurance Premiums?

Credit information is a factor many insurers consider when determining premiums for various types of insurance. Understanding how your credit history might influence the cost of your insurance policies can help you navigate the landscape more effectively.

Credit’s Role in Insurance Premiums

A strong credit history often correlates with lower premiums, while a less favorable credit history can lead to higher rates. This applies to common insurance types such as auto and homeowners insurance. For example, approximately 95% of auto insurers and 85% of homeowners’ insurers use credit-based insurance scores in states where it is permitted.

Insurers use credit information to help determine eligibility for coverage and to establish the premium amount. This process, known as underwriting and rating, assesses the perceived risk associated with insuring an individual. Your credit history, therefore, contributes to the overall risk profile that insurers evaluate when setting your policy costs.

Why Insurers Consider Credit

Insurers consider credit information because research suggests a correlation between credit history and the likelihood of future claims. Statistical analysis indicates that individuals with lower credit-based insurance scores may be more prone to filing claims. This relationship allows insurers to predict potential loss more accurately.

Insurers utilize a “credit-based insurance score,” which differs from a traditional credit score like a FICO score. While both are derived from credit report data, a credit-based insurance score is designed to predict the likelihood of an insurance loss, not credit repayment behavior. This score helps insurers assess an individual’s financial stability and perceived claims behavior.

Key Credit Factors for Insurance Pricing

A credit-based insurance score is generated from specific elements found in a credit report, with varying weights assigned to each:
Payment history, often accounting for approximately 40% of the score, assesses how consistently bills have been paid.
The amount of outstanding debt, or credit utilization, typically accounts for about 30% of the score, reflecting how much credit is used relative to available limits.
The length of one’s credit history, indicating how long accounts have been open, contributes around 15%.
New credit inquiries, reflecting recent applications for credit, can make up about 10% of the score.
The diversity of credit types, such as credit cards, mortgages, or auto loans, known as credit mix, accounts for roughly 5%.

Improving Your Credit for Insurance Savings

Taking proactive steps to manage your credit can potentially lead to lower insurance premiums. Consistently paying all bills on time is a fundamental practice, as payment history significantly influences your credit-based insurance score.

Reducing the amount of outstanding debt, especially on credit cards, can also be beneficial. Keeping credit card balances well below their credit limits demonstrates responsible credit utilization. Avoiding unnecessary applications for new credit can prevent multiple hard inquiries from appearing on your credit report, which can temporarily affect your score.

Regularly reviewing your credit reports from all three major bureaus (Equifax, Experian, and TransUnion) is a prudent step. Identifying and disputing any inaccuracies or errors on these reports can help ensure your credit information is correct. Maintaining a healthy mix of credit types and establishing a long credit history can further contribute to a strong credit profile.

Rules and Limitations on Credit Use

Regulations regarding the use of credit information in insurance pricing vary significantly. While many states permit insurers to use credit-based insurance scores, several jurisdictions have restrictions or outright prohibitions. Some states limit its use to specific types of insurance or prevent it from being the sole factor in underwriting decisions.

Consumers have rights under federal law, specifically the Fair Credit Reporting Act (FCRA), regarding their credit information. This act grants individuals the right to obtain a free copy of their credit report annually from each of the three major credit reporting agencies. If an insurer makes an adverse decision based on credit information, they must notify the consumer and provide information on the reporting agency used.

Consumers also have the right to dispute any inaccurate information found on their credit reports. If errors are corrected, insurers may recalculate the credit-based insurance score, potentially impacting premiums. Insurers must comply with both federal and state insurance laws governing its use.