Your Credit History and Credit Score Can Raise or Lower Your Insurance Rates

People with identical insurance coverage usually pay different insurance premiums based upon credit worthiness

Your Credit History and Credit Score Can Raise or Lower Your Insurance Rates
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April 23, 2018

You know that your credit history affects the price you pay for new credit, such as mortgages, car loans and credit cards. But your credit history also has a direct effect on the price you pay for car insurance with most insurance companies, except in California, Hawaii, and Massachusetts, where the practice has been banned.

Why do insurance companies use credit-based insurance scores to determine your insurance premiums?

The vast majority of insurance companies use a credit-based insurance scores to help determine your insurance premiums, claiming that the score helps them to better predict the probability of a loss. This can affect any type of insurance.

What is a Credit-Based Insurance Score?

A credit-based insurance score is a little different than the traditional credit score. It was introduced in the 1990s and tries to predict using parts of a person's credit history how likely that person is to have an insurance loss. Some research shows that there are correlations between certain aspects of a person's credit history and insurance losses. These parts of your credit report include:

  • Payment History
  • Outstanding Debt
  • Length of Credit History
  • How Often You Have Applied for Credit
  • Types of Credit You Have

People with bad credit pay more for insurance

Consumers Reports conducted a study in 2015 comparing the costs of insurance. On average, a person with poor credit paid much more for car insurance than a person with the same driving history and excellent credit. In North Carolina, for example, a new customer auto insurance quote for a single driver and a clean driving history can change drastically depending upon credit history. A driver with excellent credit was $901. That same driver with good credit paid $68 more, or $969. That same driver with poor credit paid $320 more, or $1,221.

arguments against and for credit-based insurance scoring

Against For
It penalizes drivers who suffer job loss, unexpected medical expenses, divorce, home loss due to the Great Recession, etc. If a driver has an extraordinary life circumstance, he/she can request an exemption and re-evaluation of the insurance premium. Credit-based insurance scoring is meant to find drivers with a lot of credit problems, not someone who has an extraordinary life circumstance.
It penalizes drivers for rational consumer behavior, such as shopping around for insurance, applying for a new credit card, getting a new mortgage, etc. Companies don't look at insurance inquiries to determine rates. One or two credit inquiries or many around the same time (shopping around) don't lower credit scores much and don't impact insurance premiums. Large amounts of debt and a lot of frequent credit inquires do affect premiums.
If you use one credit card in order to get rewards points as opposed to spreading your purchases across several different credit cards, your credit score takes a hit and causes your insurance premiums to rise. Credit-based insurance scores don't look unfavorable on major credit cards. Credit card usage shouldn't affect premiums unless the balance is very high e.g. near the credit limit. It also looks at multiple credit factors, not just one credit card.
It penalizes low-income and minority communities because the factors used are biased against them. People with no credit pay at least 65% more than people with a credit history. Credit is predictive of risk. A low-income or minority driver with excellent credit won't be affected with a premium increase. Credit-based risk models are accurate regardless of demographics. Everyone starts with no credit history. A person with no credit history must be treated as an unknown risk.
Drivers paying more because of their credit histories already pay more and end up paying even more than that if they have a claim, loss, or violation. Those drivers won't have as much of an increase in their premiums because they are already paying more. Premium increases are fair.
There's no relationship between credit and driving history. A driver with poor credit is no more likely to have a claim than someone with excellent credit. A driver with a lot of debt and late payments is stressed and distracted, not focused on the road, not sleeping as much, working longer hours, and more likely to have a crash or to commit traffic violations. A number of studies have supported this reasoning.
People with poor credit end up paying more money just to make more money for the insurance companies. People with good or excellent credit end up paying less money. The costs are distributed.
Missing and erroneous information on the driver's credit report can negatively affect insurance premiums. If credit results in an adverse insurance decision, insurance companies provide the name and address of the credit agency so the driver can get a free credit report for review.
A driver's credit history makes insurance premiums so much higher than they would be if credit scoring wasn't used. Insurance companies use credit-based insurance scores as only one factor. Depending upon insurance type, it will factor other items, such as zip code, age of drivers, the type of car, and miles driven.
Insurance companies don't tell you if your credit will be used as a determination of your insurance premiums. Insurance companies declare how it uses your information and gives you information when credit has resulted in a rate increase or denial of coverage.

extraordinary life circumstance exceptions

Most insurance companies in most states have extraordinary life circumstance processes that allows you to qualify for a reconsideration of your insurance premium if your credit was directly influenced by one of the following:

  • Catastrophic events declared by the federal or a state government
  • A loss that makes your home unlivable
  • Divorce or dissolution of marriage
  • Death of a spouse, child or parent
  • Serious illness or injury to you or to an immediate family member
  • Involuntary loss of employment
  • Military deployment overseas

Fight Against unfair Insurance Pricing

  • Ask your insurance company for an extraordinary life circumstances exception if you think you qualify. You should receive a notice that your credit history is affecting your premium, reducing your coverage, canceling your coverage, or denying you coverage.
  • Do business with insurance companies that don't use credit scoring or that don't reply as heavily on it.
  • Keep revolving credit balances, such as credit cards, low. The higher your balances, the lower your credit score and the more you can pay for insurance.
  • If you get credit cards, use the kinds issued through American Express, Discover, MasterCard, and Visa. Avoid credit issued by department stores, furniture stores, gas stations, etc.
  • Keep an eye on your credit reports and dispute any erroneous items. If you dispute any errors, ask for your premium to be recalculated.
  • Avoid new credit unless necessary as applying for new credit lowers your credit score.

Can I refuse to participate in credit-based insurance scoring?

You can always refuse to participate in credit-based insurance scoring, but the insurance company either won't provide you with an insurance quote or will presume you are the highest risk. Your alternative would be to find a company that does not use your credit history to determine insurance rates, but there are very few that don't do this practice.

The majority of drivers have nothing to worry about

On the whole, the majority of people don't have much to worry about when it comes to the use of credit in determining insurance premiums. A few state studies point to insurance rates decreasing for more than 50% of insured persons while only about 15% see premium increases. Of course, studies don't always give the whole picture and this can vary by state and type of policy.