Does Credit Affect My Insurance?

Although rules vary by jurisdiction, in many areas, insurers may use your credit score to establish premiums or determine eligibility.

The score used by insurers goes by a few names. You might see it referred to as an insurance score or as a credit-based insurance score. In either case, your insurance score does not match your credit score exactly, and the 2 “scores” are used for different purposes.

A traditional credit score measures your credit performance. Lenders use these scores when you request credit. In some cases, employers might also run a credit history. In the first case, this type of inquiry is called a hard pull or a hard inquiry because it is associated with a request for new credit. A hard pull can affect your credit score, although the effect is temporary.

When insurers use a credit-based insurance score, there is no request for credit, so the inquiry does not affect your credit score at all. But in some cases, your insurance score may affect your premiums or your eligibility for a policy.

As an example of how credit can affect eligibility, some life insurance companies may decline applicants who have had a recent bankruptcy.

More commonly, a less-than-perfect credit history might lead to slightly higher rates for some types of coverage.

Insurers have identified a correlation between credit history and the likelihood of placing a claim. Studies have shown a higher frequency of claims among those with a spotty credit history.

The premiums we all pay reflect the risk we may have of placing a claim. For example, someone with several speeding tickets will pay more than someone with a perfect driving record, assuming all other rating factors are equal. The “speedy” driver has a higher statistical risk of placing a claim. The same concept applies to credit history based on studies that show a correlation between credit history and claim frequency.

Insurers might look at late payments, new credit applications, bankruptcies, length of credit history. However, an insurance score does not consider race, gender, income, marital status, or national origin. Your insurance score focuses on credit history.

If you have had a late payment, chances are good that the missed payment will not have a large effect on your premiums, but rates may be higher. However, insurers weigh numerous factors when setting a premium, so a less-than-perfect insurance score might be offset by a favorable rating factor in another area, such as a clean driving record.

Credit plays a big role in more areas of our lives than we might realize, but the effects of credit challenges pass with time. A late payment that happened years ago carries less weight than a late payment that happened a month ago.

Reach out to your agent or broker for a policy review

If you live in an area where insurers use credit history as a rating factor and you think your rates may be higher as a result, reach out to your agent or broker to discuss your coverage options. Your agent or broker cannot change the way the insurer prices the coverage, but your agent or broker may be able to help you find additional ways to save money on your insurance by earning discounts or bundling your policies.