Credit Score under magnifying glass

How Your Financial History Can Affect Your Premiums

In addition to securing a loan or credit card, your credit score can affect what you end up paying for coverage 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 insurer to use an applicant's score in making its decision to issue a new policy or renew an ongoing policy. It also is legal for companies to use an applicant's 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 numbers are greater risks to insure. Industry experts contend that consumers with low numbers 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 Score is Determined

Theoretically, your number is a numerical reflection of how fiscally responsible you are. Do you take care of all 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 where you rate. The factors used in determining your standing include:

  • Major Negative Events: Do you have any collections, foreclosures, liens or bankruptcies in your history?
  • History: Do you take care of 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 Lines: How many major cards or department store cards do you have open?
  • Type of Use: Do you rely on revolving credit? 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 amount available to you?

It is important to note that the industry does use a method to determine your standing that differs from the method used by the three bureaus. Additionally, your standing can vary dramatically between companies.

What If You Disagree with the Insurance Company's Credit Score?

If an insurer denies your application based on your standing, the provider is required by law to provide you with the specific reasons you were denied. Stating that you did not receive a high enough figure based on the company's scoring system is not specific enough.

If the provider did use this type of 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 service or are charged a higher premium because of information in your report, the provider is required to provide to you the name, address and phone number of the consumer reporting company that supplied the information to the company so that you can verify the information.