The Way Insurance Premiums May Be Affected By Your Credit Score

Today most people understand that their credit scores are very important. Not everyone knows the full range of effects that a poor credit report can have, though! For example, many insurance companies in the US regularly refer credit scores when they set premiums.

Premiums are determined by insurance scores which can take credit history into consideration. This is legal in 47 states, and according to FICO data, the National Association of Insurance Commissioners reported that this is done by 95 percent of companies that provide car insurance and 85 percent of those that insure homes.

What Do Credit Scores Say About You?

Insurance companies haven’t always taken credit scores into account when they set premiums. Insurers only started investigating the idea in the 1990s. They started with the fact that frequency of claims and credit scores tended to correlate and theorized that credit scores were, therefore, an accurate predictor of future claim activity.

This idea is not without controversy. Nobody likes the idea of maintaining a flawless driving record and still paying higher insurance premiums because of a poor credit score. Bankrate estimates that a bad credit score could translate into a penalty of 20 to 50 percent on insurance premiums.

Credit-Based Insurance Scores – A Closer Look

Insurance companies don’t refer to the typical three-digit credit scores that you’re already familiar with. They calculate their own scores and these, unfortunately, are confidential. It can be difficult to find out exactly what sort of challenges you face. Each company is free to use its own credit formula. Here’s what FICO’s looks like:

* Past Credit Behavior: 40 percent
* Length Of Credit History: 15 percent
* Current Debt: 30 percent
* Pursuit Of New Credit: 10 percent
* Credit Purpose: 5 percent

FICO scores don’t consider any demographic data like age, religion, or place of residence. Credit-based insurance scores also aren’t affected by making multiple insurance applications. Loan inquiries impact your credit history but insurance inquiries don’t.

Maintaining A Good Credit Score

Even though their scoring systems are mysterious, it’s not as hard as you might think to maintain and improve your credit-based insurance score. The same sort of general practices you use to safeguard your standard credit report will work well here. According to NAIC, the same strategies for credit score repair and enhancement work here. There are, unfortunately, no shortcuts to be found: Your primary tool is still building up a long-term history of financial responsibility.

There is one other silver lining here: FICO says that having a poor credit-based insurance score for the moment will not permanently alter your insurance premiums. Improving your credit score in the future will allow you to get your rates brought down accordingly.

Consumer Reports notes that state laws prohibit insurers from considering insurance when setting premiums in three states: California, Massachusetts, and Hawaii. If you’re fortunate enough to live in one of those states, you needn’t worry about your credit if you want to keep your insurance premiums low. Your top priority should be keeping your driving record clean if you want to enjoy the most favorable rates.

In conclusion, it’s worth bearing in mind – no matter where you live – that even in states where it’s legal, no insurance company makes credit history their sole or primary determining factor when they’re setting your premiums. Maintaining a solid credit score is important for securing good insurance rates, but it is by no means the only thing you can do. Don’t despair if you have bad credit and are hoping for cheap insurance – a good driving record can still do a lot for you!