How Your Credit Score Can Affect Your Insurance Rates
In addition to securing a loan or credit card, your credit score can affect what you end up paying for insurance and at times, whether or not you can get insurance in the first place.
Through the Fair Credit Reporting Act, it is perfectly legal for an insurance company to use an applicant's credit score in making its decision to issue a new policy or renew an ongoing policy. It also is legal for insurance companies to use an applicant's credit score to determine what that applicant's premium would be if the new policy is approved.
According to the insurance industry, research has shown that individuals with low credit scores are greater risks to insure. Industry experts contend that consumers with low credit scores are more likely to file claims and that those claims are likely to be for a higher dollar amount than the average claim.
How Your Credit Score is Determined
Theoretically, your credit score is a numerical reflection of how fiscally responsible you are. Do you repay your debts or have you defaulted on any loans? Do you pay your bills on time or are you often late?
These are just two of the many factors taken into account when determining your credit score. The factors used in determining your credit score include:
- Major Negative Events: Do you have any collections, foreclosures, liens or bankruptcies in your credit history?
- Payment History: Do you pay your bills late and if so, what is the frequency of late payments? Additionally, how late are your late payments?
- Homeownership: Do you own your home or do your rent?
- Number of Open Credit Lines: How many major credit cards or department store credit cards do you have open?
- Type of Credit Use: Do you rely on revolving credit (i.e., major or store credit cards or finance companies)? Or is your outstanding debt primarily "good debt": education loans, an auto loan or a mortgage?
- Outstanding Debt: How much do you owe versus the total credit available to you?
It is important to note that the insurance industry does use a method to determine your credit score that differs from the method used by the three credit bureaus. Additionally, your insurance credit score can vary from insurer to insurer.
What If You Disagree with the Insurance Company's Credit Score?
If an insurance company denies your application based on your credit score, the insurance company is required by law to provide you with the specific credit-related reasons you were denied. Stating that you did not receive a high enough credit score based on the company's scoring system is not specific enough.
If the insurance company did use a credit score system, you should find out what specific characteristics or factors were used by the system and how you can improve your application.
Additionally, if you are denied insurance or are charged a higher premium because of information in your credit report, the insurance company is required to provide to you the name, address and phone number of the consumer reporting company that supplied the information to the insurance company so that you can verify the information.