Why Your Credit Can Impact Your Insurance Premiums

Your credit scores can affect a lot more than just your chances of credit approvals and the interest rates on your next loan or credit card account. In addition to lenders and credit card issuers there are also many other types of companies and service providers which rely on credit information to help them predict risk. One such type of company which will routinely check your credit before doing business with you is your insurance provider.

Why Lower Insurance Credit Scores May Mean Higher Insurance Premiums

Home and auto insurance providers will commonly consult your credit reports to determine the risk of doing business with you. Insurance providers are not overly concerned with whether or not you will pay your premium due in large part to the fact that you have to maintain an active insurance policy in order to keep a valid driver’s license in most states. However, insurance providers do want to know whether or not you are likely to file a claim. After all, if you file a claim the insurance company is more likely to lose money by doing business with you.

Believe it or not, statistics clearly show that there is a direct correlation between the condition of your credit and the likelihood that you will file an insurance claim. The poorer your credit rating the greater the risk you represent to an insurance provider. As such, your premiums can suffer.

The answer to “why can they do that” is the Fair Credit Reporting Act (FCRA) gives specific permission for the credit reporting agencies (Equifax, TransUnion, and Experian) to provide credit reports to insurance providers for underwriting purposes. It is completely legal for insurance companies to use your credit reports and scores to determine whether or not they wish to do business with you and how much to charge you if they do decide to take you on as a customer.

How Your Insurance Credit Scores Are Different than Your Other Credit Scores

The credit scores with which you are most likely familiar are those which are commonly used by lenders. Lender credit scores, built by FICO or VantageScore, are generally used to predict the likelihood that you will become 90 days late on any of your payments within the next 24 months. Yet as mentioned above, the credit scores used by insurance providers are designed and used to predict a different type of risk. By contrast, credit-based insurance scores are designed to predict how likely you are to files claims which will result in a loss to the insurance provider. This is known as your “loss ratio.” The most commonly used score in the insurance world is the LN-Attract Score, which is a LexisNexis scoring system.

Why Better Credit Can Help You Save Money

Although poor credit-based insurance scores may result in higher premiums, the opposite is true as well. As a result, if you work to improve your credit you might be able to save money on your future insurance premiums as a benefit of the improvement. It cuts both ways, not always to the negative.

You may find it surprising, but the condition of your credit and your credit-based insurance scores can actually have more influence over the auto insurance premium you are charged than even your driving record or any other factor. According to ConsumerReports.org single drivers with good credit scores paid anywhere from $68-$526 more per year than drivers with excellent credit scores (with the difference varying per state). The difference in premiums between drivers with poor credit and those with excellent credit would likely be even more severe.