Assuming your state allows it, auto and home insurers do take credit history into account when setting your premium, and customers with bad credit can expect to pay more. Seem unfair? Here’s why your credit can determine how much you pay for insurance – and how you can use that to your advantage.
How much more money are we talking?
Poor credit isn’t likely to get you denied outright for home or auto insurance, says Laura Adams, senior insurance analyst at insurance-shopping website InsuranceQuotes.com.
“What we see more often is that they’re not denying people, they’re raising rates,” Adams said.
InsuranceQuotes.com performed a study in October 2016 to find out how much more consumers with bad credit can expect to pay for auto insurance. Results varied by state, as some states don’t allow insurance companies to consider credit at all and some limit how much credit can be weighted in the formulas insurers use to calculate premiums.
But, on average:
- Consumers with fair credit can expect to pay 28 percent more for car insurance than a driver with excellent credit.
- Consumers with bad credit can expect to pay 104 percent more than drivers with excellent credit (essentially doubling their rates).
This disparity has grown since 2013, according to the study.
Things aren’t much better for home insurance premiums. A 2014 survey from InsuranceQuotes.com found that those with fair credit can expect to pay 29 percent more and those with poor credit can expect to pay 91 percent more, compared to consumers with excellent credit.
Why do insurers care about your credit?
You may not see a connection between unpaid collection accounts and the chance you’ll crash your car. But insurance companies have studied the predictive qualities of credit history and determined that credit health is a good indicator of how much you’ll cost them.
“What they have found is that there is a correlation between credit history and risk,” Adams says. “And they have found that consumers with poor credit tend to file more claims and even tend to file more expensive claims.”
These results (and the fairness of using credit for risk-assessment in insurance) have been confirmed and disputed by various independent entities. A handful of states prohibit insurers from using credit information, and various bills in other states have tried to regulate it.
But, for now, using credit to set premiums is a popular practice, with the majority of home and auto insurance doing it, Adams says.
Can I see the score insurance companies are using?
It’s a fair question, considering consumers have more access than ever to their consumer credit scores. A number of banks offer FICO-score access for free, and, if necessary, you can purchase your FICO scores for about $20 each before you apply for a major loan. FICO scores are the industry standard for lending decisions and an effective way to see your credit health through a lender’s eyes.
Insurers use scores too (credit-based insurance scores). But things are far less uniform and centralized, compared to the consumer-credit world.
“People say well I want to see it, I want to see this credit-based insurance score,” Adams says. “But it just doesn’t exist in the way that our consumer scores exist.”
Insurers can pay various data-furnishers (including the credit bureaus) to produce a score based on a consumer’s credit file. Instead of predicting how likely it is to pay a debt, credit-based insurance scores predict how likely a customer is to file a claim.
Some free-score tools allow you to see a credit-based insurance score (Credit Karma allows you to see your credit-based insurance score based on TransUnion data). However, there’s no telling whether your insurer is looking at that particular score, or another one.
Besides, some insurers don’t even purchase third-party scores; they have their own proprietary credit-based insurance scores that they calculate by buying your credit report and plugging pertinent information into a proprietary formula.
To complicate matters even more, there’s no way to know how heavily insurers are weighting your credit information among the hundreds of other factors they use (claims history, location, age, etc.).
“If you have a low credit score, one company may not ding you as much as another company,” Adams says. “It may not be as important to them.”
And remember: How heavily insurers are allowed to weight your credit information is legislated state-by-state.
So consumers have no real way of knowing how their credit will affect their insurance costs.
“I think that’s what makes it so mysterious,” Adams says. “How are insurance companies using this information? They don’t really tell us.”
What can consumers do about this?
You can lament how unfair it is for insurance companies to use your credit history. But we’ve never been a fan of the “woe is me” approach. Instead, we recommend the following plan of action:
1. Use saving money on insurance as motivation to build your credit score: A higher credit-based insurance score means money saved on premiums. And luckily, you don’t need to be an insurance-industry insider to know how to get one.
“To increase your credit-based insurance score, we’re told it’s really the same strategies used in raising your consumer credit score,” Adams says. “Pay your bills on time. Don’t max out your cards. Don’t apply for credit if you don’t need it. All those same things will help you.”
Here are some step-by-step instructions for raising your credit score as fast as possible.
2. Once you have better credit, use it as leverage: Insurance companies don’t usually re-rate you based on changes in your credit score once you have a policy. So if your score has improved since you first got your policy, “you have the opportunity to get re-rated and save some money,” Adams says.
First, get various quotes from multiple insurance companies. If the quoted premiums are lower than what you’re paying, but you’re happy with your current insurer (maybe they’ve handled your claims well), “give them the opportunity to keep your business,” Adams suggests.
“You have a point of comparison,” she says. “You can go back to them and say, ‘Hey I was shopping around, and I found a lower rate. This could be because my credit is better now.’ And that could prompt them to re-rate you.”
If your score has indeed improved and you’re bringing other offers to the negotiation table, you could see a drop in your premiums, Adam says.