How does your credit score affect your insurance rates?

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How does your credit score affect your insurance rates?

Your credit score may be the number that decides whether you succeed or fail financially.

Go to apply for a car or home loan, and a high credit score maximizes your chances of getting approved with the lowest interest rates possible. Apply for a loan with bad credit, and the best you may hope for is inflated rates, higher payments and a poorer financial life -- if you’re approved at all.

There’s a lot of pressure to maintain good credit, so it’s a relief to know that your score doesn’t affect your insurance rates.

Wait … you mean your credit score matters to insurance providers, too?

It’s a little-known fact, but your credit health may alter the amount you pay in premiums, be it your car insurance, your homeowners policy, even your life and health insurance plans.

It’s actually an insurance score, not a credit score

Like lenders, insurers want to know how much of a risk they’re taking with you. Generally, they’ll look at your history to develop appropriate rates, so the person who’s had five fender benders and 10 speeding tickets in the last year will have higher premiums than the person with a spotless driving record. If your credit score tells them that you’re bad with your finances, it can send the message that you’re irresponsible in other areas of life, making you a higher insurance liability.

This type of predicting model may point an insurer in the direction of pricing their premiums higher for the person with bad credit versus the person with good credit and a lower risk-taking profile.

With auto insurance, studies even show that motorists with poor credit pay up to 91 percent more in insurance than drivers with excellent credit. By gauging your risk level through your FICO score, insurers can accordingly put a price on the policy they offer you. Low risk = low premiums, high risk = high premiums.

Not all of the information in your credit report is useful to an insurance provider. Since they want to predict the possibility of you being involved in a situation that could trigger a claim, certain aspects of your credit report are isolated and then calculated into a special credit-based insurance score, an amalgamation of your credit score and insurance history.

Insurance scores are not made publicly available, so there’d be no way of obtaining it with your regular credit score. FICO scores range from 300 to 850, from bad to excellent, and insurance scores fall on a similar scale: 300 to 997 is standard, with anything above 700 and 800 considered good to excellent.

What goes into an insurance score? It may factor in things like your payment history or your existing debt, two of the most important components of your credit score. Insurance provider Progressive says that it calculates insurance scores based on several elements of your credit report; favorable factors may include a long-standing credit history, a healthy mix of credit in good standing, no late payments, and a low credit utilization.

However, if you use too much credit, have accounts in bankruptcy or collections, or you’ve made too many late payments, your insurance score may reflect you as a high risk policyholder.

Unlike banks or lenders, the insurer says that it doesn’t consider your income, your job history and other matters when calculating your insurance score. The company notes that it also won’t deny customers a policy based on their insurance score, but your rates could be affected. Your insurance score is then configured by taking the data and weighing it against information culled from other policyholders with similar credit and insurance claim characteristics, like the type and amount of insurance claims filed.

Insurance credit scoring isn’t without its critics. Many consumer advocacy groups claim that it singles out and penalizes consumers whose credit scores may have taken a hit due to financial hardship or other circumstances beyond their control, not necessarily because of careless credit behaviors.

"Insurance credit scoring is unfair because it penalizes consumers for rational behavior," writes insurance nonprofit United Policyholders. The group maintains that insurers quote customers high premiums if you don’t grant them access to your credit report -- but once they have it, they can refer to it at any time.

However, depending on where you live, insurance scoring may not make a difference. Some states prohibit insurers from using your credit information in their rate determinations; those include California, Massachusetts and Hawaii for auto insurance, and Maryland and Hawaii for homeowners insurance.

Here’s how your insurance score affects four different types of insurance:

Auto insurance

Your score can impact your car insurance rates in a big way. A Consumer Reports survey discovered that a couple with poor credit will pay more than $2,090 more in premiums to insure two cars than a couple with excellent credit. Coupled with that, some insurance providers have determined that married people tend to be safer drivers, so not only is their insurance risk lower, but having excellent credit in the mix means cheaper rates.

For auto insurance, insurers are required to notify you if your premiums have gone up, or your policy canceled, due to a drop in your credit or insurance score. Called an adverse action notification, you can contest it by requesting and filing an "extraordinary life circumstances exception" with your provider. If an adverse action has been taken against you, your insurer, per law, is required to notify you of your insurance score.

Homeowners insurance

A consumer with credit on the cusp of fair to good can expect to pay more than a third more on their homeowners policy premiums than someone with excellent credit, and with good reason: insurance claims may be more common and expensive than other policies, and with the higher price comes a greater financial risk to the policyholder.

Health insurance

Your credit may not factor into your health insurance rates as much as auto or homeowners insurance, but that doesn’t mean a clean bill of health makes you immune to higher premiums. Health insurance providers are mostly concerned if you pay your health-related bills on time -- for instance, if you have your own insurance policy and you’re late paying your premiums, it could negatively affect your rates. Medical treatments that you’re paying out of pocket on an installment plan may also play a role depending on how timely you pay off the balance.

Life insurance

Your credit score may not matter a much to life insurance providers, but insurers may still have an incentive to check your credit report for any history of major financial difficulties, like a bankruptcy; filing for Chapter 7 within the last 12 months, for example, can cause you to be automatically declined for a policy.

Ensuring a good insurance score

Keeping your credit score high is essential to your personal finances whether insurance is or isn’t a part of it. Start by consulting your credit report at least once a year (you’re allowed one free report annually). Review it carefully, and dispute any errors that could cause your credit score to drop. A low credit score equals a low insurance score.

Always be on the lookout for better insurance rates. Different insurers utilize different standards to determine your rate, which could mean cheaper premiums. Search for the right plan and the right deductible, and that could mean saving money in the long run, regardless of your credit score or how it’s taken into account.