I get this question a lot, “how does my credit score affect my insurance premiums?”
Insurance companies evaluate a number of risks when it comes to your auto and home insurance. Let’s say you’re getting car insurance quotes. Your agent might ask a few of the following questions:
“Have you had any accidents or tickets recently?”
“How long have you been with your current insurance company?”
“What type of car do you drive?”
“How long have you been driving?”
There are many things that impact your car and home insurance premiums. Credit is part of it.
Credit Score vs Credit-Based Insurance Score
For starters, you need to know the difference between your credit score and your credit-based insurance score (aka insurance score).
Your credit score is a number a lender uses when assessing the terms and interest rate of your car or home loan. It allows him/her to determine if you will be financially responsible in repayment of the loan. The better your credit score, the better interest rate and terms you will receive.
When it comes to insurance, insurance companies use a credit-based insurance score. This is only part of your credit score. Credit-based insurance scoring does not use all of the same elements as a credit score.
For instance, your insurance score does not take into consideration your age, gender, marital status, or income (just to name a few).
According to the National Association of Insurance Commissioners, FICO looks at these five items when determining your score*:
- Payment History
- Outstanding Debt
- Credit History Length
- Pursuit of New Credit
- Credit Mix
The bullet points above that FICO’s referring to are affected by our day-to-day actions. Some stuff to think about…Do you pay your bills on time? Do you have several open credit accounts? How many credit cards do you have with balances exceeding 50%?
I should also note, as an insurance agent, I do not have access specific details in your credit history.
How Does Credit Affect Your Insurance Premiums?
Your credit-based insurance score will be used to forecast future losses. Studies show the higher your insurance score, the less likely you will have a loss and file a claim.
Separate studies by the Texas Department of Insurance (TDI), the University of Texas, Tillinghast Towers-Perrin, EPIC Consultants and others have proven that credit-based history correlates with the risk of insurance loss. The recent TDI study showed that: (source: Insurance Information Institute, January 2005)
- The average loss per vehicle for people with the worst insurance scores is double that of people with the best credit-based insurance scores.
- Homeowners insurance loss ratios for people with the worst insurance scores are triple that of people with the best scores.
- Drivers with the best credit history are involved in about 40 percent fewer accidents than those with the worst credit history.
Source: FICO Credit-Based Insurance Scores
How can you improve your credit?
Consistency. Every month, pay your bills in a timely manner.
Stay away from using your credit card for large purchases. If you need to use your card, pay it off when the bill comes in the mail.
Your insurance score won’t improve overnight. It is a process. Showing a pattern of responsibility is key.
There is good news! You don’t have to be in the dark when it comes to knowing what affected your insurance score. You may contact the following agencies to get that info:
TransUnion 800.888.4213
Equifax 800.685.1111
Experian 888.397.3742
I hope this shines some light on the murky waters of how your credit can affect your insurance premium.
Still have a question about insurance scores? Leave a comment below.
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