You probably know that credit plays a big part of your life as a consumer. It affects your ability to get approved — and swoop in on the most favorable terms and rates — for everything from car loans, a mortgage, credit cards, to personal loans.
But did you know that credit also matters when you try to purchase an insurance policy? Let’s dig into why that is, and what you can do to make sure your credit score is in tip-top shape when while shopping for insurance:
Why does credit matter with insurance?
At first, the connection might not be clear why having good credit can help you secure an insurance policy. After all, you’re not taking out a loan or a line of credit. Why would credit matter?
Here’s the thing: When you’re taking out an auto or homeowners insurance policy, insurers will take a look at your credit during the underwriting process.
This is because there’s actually a link between the likelihood of you filing a claim and having an insurance loss. In turn, your credit score helps determine the cost of your policy.
What is a credit-based insurance score?
Your consumer credit scores, which are based on scoring models such as FICO and VantageScore, help you determine your creditworthiness. They’re used during the insurance underwriting process. In other words, how likely you are to miss a payment.
There is another type of credit score that impacts how much you’re paying for insurance. And it’s called a credit-based insurance score. While a credit-based insurance score largely pulls from your consumer credit report, it’s designed specifically for insurance companies.
Both your consumer credit score and credit-based insurance score affect your insurance premiums.
Credit-based insurance scores and reports are created by companies such as FICO and Nexis Lexis. They help insurers determine how risky you might be as a customer, which can in turn influence whether they approve your application for insurance. Your insurance-based credit score also plays a part in determining the cost of your premiums.
What makes up a credit-based insurance score?
Let’s take a quick look at what exactly makes up a credit-based insurance score. Like a regular consumer credit score, a credit-based insurance score can be broken up into five parts:
Payment history. 40%. This makes up a fair chunk of your credit score
Outstanding debt. 30% of your score is determined by how much debt you currently owe
Length of credit history. 15%.
New credit. 10% If you’ve applied for new types of credit, any hard pulls on your credit file might impact your score.
Credit mix 5%. The different types of credit you have
What other factors affect your credit score?
An insurance company also cannot deny, cancel, or not renew your policy based solely on your credit scores. And your credit score isn’t the only factor insurers take into consideration when gauging how much your policy will cost. Other factors that impact how much your auto or homeowners insurance cost include:
While not an exhaustive list, here’s what else can impact the cost of your insurance premiums:
Characteristics of your home or car: For homeowners and auto insurance, characteristics of what you’re trying to insure, such as the make, model, and year of your car, can impact the cost of your premium.
For homeowners insurance, characteristics such as the type of roof you have, how large your home is, whether you have a home-based business, can affect the cost of your premiums.
Your driving record. A clean record will help lower your car insurance premium.
Age and gender. While race and ethnicity are never used when determining your premiums, when it comes to auto insurance underwriters might look at your age and gender.
Where you live. For both homeowners and car insurance, your ZIP code can impact the cost of your premiums.
Types of coverage. The amount of coverage, exactly what’s covered, plus your deductible can either increase or decrease how much you’re paying out of pocket.
Lapsed coverage with another insurance company. If you were late or missed payments on your insurance policy, and in turn were dropped from the policy, it could increase your premiums when you shop for another policy with another company.
To avoid being late or missing a payment altogether, you can pending cancellation of your policy by tapping into Cover’s credit feature.
If you are signed up with Cover Concierge and have a Progressive policy, you’re eligible for 50% of your premium, up to $100, to cover your premium.
Are credit-based insurance scores ethical?
It turns out there’s actually some debate over whether using credit-based insurance scores to approve an application and determining rates is fair.
Some consumer advocacy groups feel that it is unfair, partly because many consumers don’t understand how credit-based insurance scores work. And other groups feel that the use of credit-based insurance scores negatively impact low-income and minority groups the most.
As mentioned, the cost of your premium is typically not determined solely on your credit score. As insurance laws vary by state, some states prohibit credit scores from being the only factor used in an insurance premium.
Some states allow credit-based insurance scores to be used only for auto and homeowners insurance, while others permit them to be used on other types of insurance. And a handful of states require that if credit plays a role in denying, canceling or renewing your policy, you need to be given a head’s-up.
Tips on maintaining a strong credit score
As credit-based insurance scores largely pull from the same data as your regular credit score, and the categories are the same, you can maintain a solid score by doing the following:
- Monitoring your credit to see what financial behaviors might ding your score
- Ordering a credit report to review for any errors, and to get an idea of where you stand credit-wise
- Staying on top of your rent, bills, loan and credit card payments
- Keeping a low balance in relation to your total credit limit on all your cards
- Keeping credit lines open
- Having different types of credit
While credit isn’t the only factor that determines your premium rates, knowing how it impacts your ability to get approved for a policy and can help you build strong credit and avoid costly mistakes.