The fact that credit history influences the chances of getting approved for a loan
is common knowledge, but most people are unaware their credit score determines how
much they pay for insurance. In many cases, insurance companies do not properly
disclose these tactics and individuals are notified after their insurance rate has
Take the example of Mathew Williams from New York. He was notified by his insurance
company that his annual premium would be increased by $628 based on his recent credit
score. Matt moved fast to check his credit report online and found his credit score
had fallen from 680 to 540, a drastic decrease. He had recently been in a car accident
and numerous unpaid medical bills were left on his credit. So not only did he eventually
have to pay these medical bills, Matt was forced to pay the higher insurance premiums.
A credit score can range between 300 (lowest) and 850 (highest). Theoretically it can
be 900 but that’s rare. Credit scores ranging 600-650 are considered fair and over
700 is pretty good.
Why is an individual’s credit score used by insurance companies to determine rates?
The insurance companies evaluate risk and then reward customers who are less likely to
incur losses with lower premiums. The best way to do this is by using the credit scores
reported by the credit unions to determine if the applicant is responsible. It is
important to realize your credit score affects the cost of your insurance premiums.
Insurance companies are looking at the credit report to measure insurance risk rather
An insurance research firm found out that 92% of the top 100 auto insurance companies
in the country use credit data when underwriting new policies. These factors which are
considered by insurance companies that are relevant to calculating risk include,
bankruptcies, judgments, collections and delinquencies. The different number and the
types of credit accounts a customer has and the length of account history are also
considered. Insurance companies say that credit scores are justified to correlate a
low credit score with increased risk. According to studies, people who fail to pay
their bills are more likely to file a claim.
Today, more than 90% percent of auto insurance companies nationwide use credit scores
as a means of deciding rates. A large number of home insurance companies are slated
to follow the same standard. Currently, California and Maryland are the only states
that prohibit credit-based insurance scoring.
The laws and regulations that govern insurance are decided at the state level. This
means that your place of residence actually determines what information companies
gather and how they can use it, to assess insurance risk. It is important to be
focused on removing the negative points from your credit report to increase chances
of receiving lower insurance rates. Insurance Policyholders are classified as
preferred, average or high-risk. This classification has a considerable impact on
what rate an insurance company charges you.
Tips to avoid low credit scores
- Keep an updated list of all accounts, due dates, balances and credit limits
(automate your bill paying process).
- Pay bills as soon as they arrive (as many as 100 points can be deducted per default).
- Keep an eye on all accounts carefully (keep balances low and spend around 1/3rd
of your credit limit).
- Minimize credit card applications (avoid unnecessary credit).
- Check your credit report at least once a year.