How credit scores impact insurance rates

Why would an insurance company want to know your credit score before offering you a policy?

Put yourself in their executives’ wingtips or heels. If you were essentially investing in somebody else’s auto, home, health or life risk, wouldn’t you want to know a little more about them?

“The insurer is looking to price the policy to reflect their risk,” says Michael Barry, spokesman for the Insurance Information Institute, a New York-based trade group. “They’ve found that people who manage their finances well also manage other important aspects of their lives responsibly.”

You can keep an eye on your credit score for free at myBankrate.

Susan Wright, a St. Louis-based insurance expert and author, says insurers pull only certain aspects from your FICO credit score — including your payment history and total debt — to create what’s called your insurance score.

Auto and home insurers use this to weigh the likelihood that you’ll file a claim, miss a payment or attempt insurance fraud. Life and health insurers tend to focus primarily on payment history and the impact of your finances on your overall well-being.

Here’s how your credit score could affect your auto, home, health and life insurance rates.

Auto insurance: Credit can drive rates

Auto insurance: Credit can drive rates © iStock

For decades, auto insurers have insisted that their actuarial data supports a correlation between sketchy credit and insurance risk. The feds tend to agree.

But consumer groups counter that using credit scores to set auto rates not only discriminates against lower-income drivers, but it also breaks with a long-held underwriting goal to encourage safe driving.

“When you start using things that aren’t risk-related, you undermine the safety incentive of the pricing mechanism,” says Robert Hunter, director of insurance for the Consumer Federation of America. “The pricing mechanism should signal safer behavior.”

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Regulators and lawmakers in most states side with the insurers. Just 3 states — California, Hawaii and Massachusetts — prohibit the use of credit scores to set auto rates.

Author Wright explains that insurers combine your claims history and credit score components into an insurance score, which can range from 300 to 997. Credit-based insurance scores above 700 are considered good and those above 800, great. The lower the score, the higher the auto premiums.

“A good rating, you’ll pay 35% more,” Hunter says. “A fair rating, 50% to 75% more, and a poor rating, you’ll pay double or more.”

Home insurance: Bad credit raises the roof

Home insurance: Bad credit raises the roof © iStock

Home insurers place serious emphasis on credit scoring, and little wonder. After all, a home has far more claims potential than a vehicle, and the repair costs can be far steeper.

Bankrate’s found homeowners with merely fair credit can expect to pay 32% more for their home insurance policy than those with excellent credit. Rates for those with poor credit are 2 times higher, on average.

California, Hawaii and Maryland are the only 3 states that bar insurers from using credit data to set home insurance premiums. “Consumers don’t really realize how much their credit score can affect their rates,” says Wright.

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To improve your credit-based insurance score, she says:

  • Pay down debt.
  • Pay bills on time.
  • Resist applying for new credit cards.
  • File few or no insurance claims.

“If you do improve your credit score, go back and ask for a rate review with your insurer,” Wright advises.

Since insurers are typically reluctant to share your insurance score with you, Barry, of the Insurance Information Institute, says your best bet is to shop around.

“The weight accorded a credit-based insurance score differs from insurer to insurer,” he explains.

Health insurance: Credit, longevity linked

Health insurance: Credit, longevity linked © iStock

Relax! Health insurers won’t put your credit score under a microscope.

“They’re mainly looking at your payment history to see if you’re going to pay your premiums,” says Wright.

In fact, if you’re covered by an employer group plan, the insurer may not even bother with your credit, since the premiums are automatically deducted from your paycheck.

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But it’s not that the insurance company is disinterested. Health insurers, after all, profit most by keeping you healthy and out of the doctor’s office. And there’s growing evidence that your financial health may have an impact on your well-being and longevity.

A long-term study published in the Proceedings of the National Academy of Sciences, which has followed 1,000 New Zealanders from birth to age 38, finds a strong correlation between poor credit scores and poor health.

The conclusion: Those who fail to take care of their money pose a greater risk to themselves (and hence, their health insurer) than those who do.

“Being able to pay your bills may make you more attractive to insurers,” Wright says, which could translate to better rates with some private health insurers. So, again, shop around.

Life insurance: Good money managers wanted

Life insurance: Good money managers wanted © iStock

Life insurance companies also want you to live long and prosper. The longer you pay premiums, the less paying out your death benefit will sting the insurer.

If your credit history reveals responsible money management, some companies may even sweeten your rate.

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“Studies have shown that if you have the income and are able to pay your bills with regularity, you’ll probably live a lot longer,” says Wright. “If the insurer doesn’t have to anticipate a claim for a longer time, it could definitely improve your rate.”

In fact, should your health and wealth take a turn for the better, Wright suggests asking your life insurer to re-rate you, just as ex-smokers do with health insurance.

“Anything that can improve your life expectancy may be worth a reset,” she says.