How credit affects insurance rates
Quick insights
- The impact of credit scores on insurance rates varies widely due to differing state regulations.
- A higher credit-based insurance score may lead to lower car insurance premiums in states where insurers are allowed to use credit information as a key factor. The impact depends on state regulations.
- Managing your credit wisely may lead better insurance scores and lower premiums.
Think your credit score only matters when buying a car? Guess again! Some insurers may review and adjust your premium upon renewal or at your request if your credit-based insurance score improves, subject to their policies and applicable state regulations.
How insurers use credit-based insurance scores
Insurers utilize credit-based insurance scores as a helpful indicator of a potential policyholder's risk level. A higher score suggests that the individual is less likely to file claims, based on historical data correlating financial responsibility with claim frequency. This assessment helps insurers determine the likelihood of a policyholder filing a claim, which directly influences the underwriting process.
It can be important to distinguish between a general credit score, which lenders use to assess creditworthiness for loans and credit cards, and a credit-based insurance score, which insurers use specifically to predict the likelihood of an insurance claim. While both scores are influenced by similar factors such as payment history and credit utilization, the insurance score focuses more on predicting risk related to insurance claims rather than credit default.
The information derived from a credit-based insurance score can play an important role in setting the premium rates for policyholders. Individuals with higher credit-based insurance scores may be eligible for lower premiums, as insurers sometimes consider these scores when assessing risk. Eligibility and impact can vary based on insurer practices and state regulations. Individuals with lower credit-based insurance scores may experience higher premiums, as some insurers consider these scores when evaluating risk. Again, the impact of a lower score depends on insurer practices and applicable state regulations.
Financial factors in credit-based insurance scores
Understanding the components that influence your credit-based insurance score can help you manage and potentially improve your score.
- Payment history: Payment history is a significant factor affecting both your credit score and your credit-based insurance score. For insurance purposes, a history of on-time payments can suggest reliability and financial stability. This can potentially lead to lower premiums, as you could be perceived as less likely to file claims.
- Credit utilization: How much of your available credit you are using is another one of the most important factors in determining both credit score and insurance premiums. A credit utilization ratio of 30% or more may signal financial stress, which insurers might see as an increased risk
- Age and types of credit: A longer credit history provides more data for insurers to analyze, which may lead to a more favorable insurance score. Having a mix of credit types, such as retail accounts, mortgages, auto loans and installment loans, is often viewed positively by insurers and may help demonstrate your ability to manage different financial obligations, potentially reducing perceived risk.
State regulations and their impact
The use of credit-based insurance scores in determining insurance premiums is not uniform across all states. Some states have enacted laws that restrict or completely prohibit the use of credit information in setting insurance rates. This variability means that the impact of your score on your insurance premiums can differ significantly depending on where you live.
In states where credit-based insurance scores are allowed, there are often regulations in place to protect consumers. These regulations may require insurers to disclose when and how credit information is affecting insurance rates. Additionally, depending on the state, consumers might have the right to request that their insurance scores be re-evaluated if they believe their score has improved or was calculated incorrectly.
Improving your credit-based insurance score
Enhancing your credit-based insurance score may lead to lower premiums and better insurance options.
- Regular credit report checks: Monitor your credit reports from the three major credit bureaus—Equifax®, Experian™ and TransUnion®—to ensure accuracy. You can request a free credit report from each of these credit bureaus once per year, so it’s possible to receive a free report once every four months. Dispute any errors or inaccuracies promptly, as these can negatively affect your insurance score.
- Reduce outstanding debt: Lowering your overall debt levels can improve your credit utilization ratio, a key component of your score. You can consider paying down high-interest debts first, which can also save you money on interest payments.
- Set up payment reminders: Ensuring that all your bills are paid on time can go a long way toward improving your score, as late or missed payments can damage your score, potentially significantly. Consider setting up automatic payments for your regular bills to avoid missing due dates.
- Utilize credit monitoring tools: Regularly checking the factors that impact your credit-based insurance score can be useful. Tools like Chase Credit Journey® can help you track your credit score provided by Experian for free and provide personalized insights and tips to improve it. Note: You don’t have to be a Chase customer to use Credit Journey® for free.
Additional strategies to consider
Beyond improving your score, there are other strategies to consider that can help you secure better insurance rates.
- Shop around: By shopping around, you may find an insurer that places more or less emphasis on credit history or offers more competitive rates for your score range.
- Consider your deductible: Opting for a higher deductible can lower your premium costs, while a higher premium in turn can lead to a lower deductible. It’s important to make sure you can afford the higher deductible in case of a claim. Drivers who have a good driving record and rarely file claims might benefit from a higher deductible and lower premium.
- Take advantage of discounts: Many insurers offer discounts for various reasons, such as having multiple policies with the same company, maintaining a good driving record or installing safety devices in your vehicle. Review your policy and/or talk to your insurer in order to receive the discounts for which you qualify.
The bottom line
Understanding the role of credit-based insurance scores in determining insurance premiums can help you manage your finances effectively. By staying informed about how different states regulate the use of these scores, will be able to know how much your credit may impact insurance costs.
