Heritage Financial Planning

Does Your Credit Score Affect Your Insurance Rates?

February 03, 2022

It's true, your credit score can affect many aspects of your life. From loans, to purchasing a vehicle or a house, or even setting up utilities—your credit score comes into play. But when it comes to the insurance you require in your everyday life, it's important to wonder whether or not your credit score will make an impact. 

The Difference Between Credit-Based Insurance Scores and Credit Scores

Before we get into how your credit score is affected, it's important to make the distinction between these two scores. Most of us are familiar with credit scores when it comes to lenders and their need to assess the risk associated with a potential borrower. 

However, this is not the only way in which they are used. Your credit information is commonly used by insurance companies when assessing the risk of those applying for new policies or policy renewals. 

Credit-based insurance scores may have a similar name, but their usage differs. These scores are designed to predict the likelihood that you'll file an insurance claim. The better your credit-based insurance score, the better your premiums and rates will be. 

Much like your standard credit scores, credit-based insurance scores are also affected by similar information from your credit report—such as making payments on time and maintaining low balances on your credit cards. 

Car Insurance

When it comes to your car ownership, your credit score does indeed affect your premiums. Many auto insurance companies located in the United States use credit-based insurance scores. This allows them to assess the appropriate level of risk when it comes to providing you with quotes. 

There are some notable exceptions to this practice, however, such as Massachusetts, California, Michigan, and Hawaii—all four of these states have banned this type of practice. These states either limit or prohibit insurance companies from using your credit score to determine your auto insurance rates. 

If you don't live in one of these states, you can still relax a bit about this process. While in the remaining forty-six states insurers will consider your credit score and history, this isn't the sole determining factor in whether or not they choose to make you a policyholder, and how high or low your premium will be. States are more or less prohibited from making your score the end all and be all. 

Homeowner's Insurance

Much like auto insurance, your credit score isn't the sole factor in determining your premiums. That being said, providers of homeowners insurance will check both your credit and your credit-based insurance scores. 

In California, Massachusetts, and Maryland, your insurance score isn't factored into your approval/denial or your rate. In Oregon, the insurer can use your score for an initial rate, but cannot use it for approval or setting later rates. 

If in fact an insurance company does use your insurance score—a few factors can impact what your score will be:

  • current account balances
  • debt payment history
  • recent credit applications
  • if you've declared bankruptcy 

The higher your score, the greater the likelihood that your policy will have a lower rate, but it is not the ultimate determining factor, so don't be too concerned over the score. 

Life Insurance Premiums

When it comes to your life insurance policy, your credit score doesn't factor into how much you'll be paying, but your credit-based insurance score will. Your income, debts, past bankruptcies, among other factors play a role in determining the score, much like you'll see with your other insurance policies. 

How Can I Improve My Score?

Oftentimes the areas that are impacting your credit include missing payments, having little or no credit history, applying for too many loans or credit cards at once, and high credit card balances. 

If your score is currently affected and it's impacting your rates or ability to get insurance, it's best to look at these areas and assess what changes you need to make in order to improve your score. Your credit report is a great place to start. 

Once you examine your credit report, you'll be able to pinpoint the exact causes of your low score. Depending on the factors that are impacting your credit you'll have to make changes such as resolving to pay all bills on time. Get organized, create a calendar, set reminders, whatever works best for you. 

If your credit utilization is high, take steps to lower it. Ideally it'd be best if you paid off your balances each month, but that's not always feasible. At the very least try to keep your outstanding balance at around 30% of your total credit limit. As time goes on, try to keep lowering that percentage to get closer to paying your full balance each month. 

For those with a limited credit history, there are a few programs that help you use financial information that doesn't normally factor into your credit score. For example, these programs can leverage your banking history and utility payments to help fatten up your thin credit profile. 

Do you need guidance for your insurance needs?

Sometimes insurance premiums can become expensive, and there can come a time when you need to make decisions about what you can afford. This can be hard to navigate alone, which is why professional insurance analysis can assist you in making those decisions. The team at Heritage Financial Planning can help you assess your needs so you can make the choices that make the most fiscal sense. We encourage you to reach out to our team for more information.

Written By: Heritage Financial Planning Team

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