3 ways your credit affects your insurance

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3 ways your credit affects your insurance

If you think your credit score only comes in handy when applying for loans and credit cards, think again. Your credit can affect your insurance policies, including auto insurance, homeowners insurance, life insurance and more.

Insurance is necessary to protect you and your property against disaster, and good credit can help you appear less risky to insurers and save money on your policies. (Policygenius can help you compare prices for life insurance, which may also help you save money.)

Here are three ways credit affects your insurance.

1. Credit affects your credit-based insurance score

Before they extend coverage to a new policyholder, insurance companies evaluate the risk factor of potential customers, looking closely at the history of the individual requesting insurance.

For example, an auto insurance company may look at your driving history, including accidents and moving violations, to determine your likelihood of filing a claim in the future.

Insurers also look at information in a consumer’s credit report to generate a credit-based insurance score, a three-digit number that helps them assess your risk level and make a decision about your coverage.

Credit-based insurance scoring is widespread in the insurance industry. FICO estimates that 95% of auto insurers and 85% of homeowners insurers use credit-based scoring models during the underwriting process in states that allow it (in some states, credit-based insurance scoring for certain insurance types is prohibited).

Unlike your normal credit score, your credit-based insurance score isn’t publicly available. To evaluate your risk factor as a policyholder, insurers check your credit report for many of the same things as traditional lenders. For instance, Progressive says it considers payment history and current available credit balances in the underwriting process.

If your credit-based insurance score is too low - especially if you have other factors counting against you - insurers could deny your policy or charge a higher premium.

Unlike credit inquiries from lenders and creditors, insurance-related inquiries do not affect your credit score.

2. Credit affects your ability to get a policy

Poor credit won’t block you from buying insurance in most cases, but it can keep you from getting the policy you want. Insurers can decline to offer you a policy if your credit or credit-based insurance score is bad enough, which means you’ll need to shop around with other providers or work on building your credit.

If you’ve filed for Chapter 7 bankruptcy within the past 12 months, you may have trouble getting a life insurance policy, especially if your bankruptcy hasn’t been discharged. If it has been discharged, you will need to find an insurer that will work with you. Different insurers require different lengths of time to pass after discharge before they will work with you.

For a longer explanation of how bankruptcy can affect your ability to buy life insurance, check out our guide on that very subject.

3. Credit affects your premium

Your insurance premium, or the amount of money your insurance policy will cost, is directly affected by your credit. The practice of using your credit to determine insurance rates has been around for years.

Generally, the better your credit, the lower your premium will be. If you have a low credit score and a lot of negative items on your credit report, you can expect your premiums to be higher.

According to Consumer Reports, single drivers with good credit scores paid $68 to $526 more per year on average than similar drivers with the highest credit scores. And if you are involved in an accident or moving violation that causes your premiums to rise, having bad credit can cause it to go up even more.

This extends to many types of insurance providers, including auto insurance, homeowners insurance and renters insurance. If you get your health insurance through your employer, your credit may not matter as much, but if you buy your own policy, your credit could play a factor in your premium.

You have the right to a free copy of your credit report when it results in a higher premium. Some states do not allow insurers to determine your premium based on your credit (California, Massachusetts and Hawaii for auto insurance and Maryland and Hawaii for homeowners insurance).

If you’re planning on buying insurance soon, check your credit report to make sure it is representing you in the best way possible. If you can wait, you may want to work on building your credit before you buy a policy.

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