Introduction
Many people are surprised to learn that their credit history plays a significant role in the insurer’s decision-making process when applying for auto or homeowners insurance. Insurance companies often use credit-based insurance scores to assess an applicant’s level of risk and determine the cost of premiums. While this practice is controversial, insurers argue that there is a strong statistical correlation between credit history and the likelihood of filing insurance claims.
Understanding how your credit history influences your insurance application can help you take proactive steps to improve your financial standing and potentially lower your insurance costs. This guide will explain why credit history matters, how insurers determine your insurance score, and what you can do to protect yourself if your credit negatively impacts your insurance options.
Why does your credit history matter when you apply for insurance?
Studies by independent researchers and insurance industry actuaries have convinced insurance companies that a strong correlation exists between your credit history and the likelihood that you’ll file an insurance claim. Using information contained in your credit record, an insurer calculates your insurance score. If your insurance score is low, the insurer may consider you to be less of a risk than if your insurance score is high.
How is your insurance score determined?
Although methods vary, an insurance company typically calculates your insurance score by applying a mathematical formula to statistically significant factors on your credit record. These factors may include the amount of debt you have outstanding, whether you have serious blemishes on your credit report (such as past-due amounts, collection actions, and bankruptcies), and the number of times you’ve applied for credit within the past year.
Will a low insurance score prevent you from buying insurance?
Not necessarily. Because your insurance score is generally just one of the factors insurers use to decide whether or not to offer you coverage, an insurer may decide to approve your application even if you have poor credit. However, a low insurance score often places you in a higher risk category, and you may end up paying a higher premium for insurance.
Keep in mind, too, that every insurance company has its own underwriting standards. Even if one insurance company rejects your application due to poor credit, another insurance company may issue you a policy.
What if you have little or no credit history?
In many states, having little or no credit history automatically places you into the “average” risk category. Other states prohibit insurers from even using credit as an underwriting factor if you have little or no credit history.
Can your insurer cancel or refuse to renew your insurance based on your credit?
In many states, an insurer can cancel or refuse to renew your insurance policy if your credit has deteriorated. However, some states have passed legislation prohibiting insurers from using your credit report as the sole basis for making decisions about cancellations and renewals.
Is there anything you should do?
Insurers must tell you if they look at your credit history when they consider your insurance application or when they determine the rate you’ll pay for insurance. To find out if your credit history has affected your ability to get insurance or your insurance premium, contact an insurance company representative. Here are some other things you can do:
- Since laws vary from state to state, contact your state’s insurance department if you have questions about the regulation of credit-based insurance scoring in your state.
- Know your rights. Under the Fair Credit Reporting Act, insurers must inform you that they’ve turned down your insurance application based on information in your credit report, and notify you that you have a right to request a free copy of that credit report.
- Shop around for insurance coverage. Different insurers have different policies regarding the use of insurance scores. The cost of insurance premiums may also vary, so comparison shop for the best deal.
- Check your credit report once a year. Order copies from the three major credit bureaus (Experian, Equifax, and Trans Union) and make sure they contain correct information. Dispute any errors with both your creditors and the credit bureaus.
- Ask your insurance company to rerun your credit score if you feel that doing so would improve your insurance rating (many states allow consumers to request this once per year). But check insurance regulations in your state first–some states allow insurers to take adverse action against current customers based on downturns in their credit scores.
Conclusion
Your credit history is more than just a factor in loan approvals—it can also influence your ability to obtain insurance and the rates you pay. While a low insurance score won’t necessarily prevent you from getting coverage, it can result in higher premiums or even policy cancellations in some states. That’s why it’s essential to stay informed about how insurers use credit information and what rights you have under consumer protection laws.
To safeguard yourself, regularly check your credit reports, dispute any inaccuracies, and shop around for insurance coverage, as different insurers weigh credit factors differently. Additionally, understanding state-specific regulations can help you navigate your insurance options more effectively. By taking these steps, you can work toward improving your credit score, securing better insurance rates, and maintaining financial stability in the long run.
Scarlet Oak Financial Services can be reached at 800.871.1219 or contact us here. Click here to sign up for our weekly newsletter with the latest economic news.
Source:
Broadridge Investor Communication Solutions, Inc. prepared this material for use by Scarlet Oak Financial Services.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances. Scarlet Oak Financial Services provide these materials for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
