Many people are surprised to learn that their credit can impact their homeowners insurance and auto insurance rates. If you have ever received a higher quote than expected, your credit history may be a factor.
Here is a clear breakdown of how credit affects your insurance premiums and what it means for you.
Credit Score vs. Insurance Score
You may already be familiar with your credit score from lenders. Insurance companies use a different metric called a credit-based insurance score.
An insurance score:
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Uses information from your credit history
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Helps predict the likelihood of future insurance claims
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Is used for insurance pricing and underwriting
This score is not the same as your traditional credit score and is not used to evaluate your income or financial status.
Why Insurance Companies Use Credit Information
Insurance companies rely on data to assess risk. Studies show a connection between certain credit behaviors and the likelihood of filing claims.
In general:
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Individuals with stronger credit histories tend to file fewer claims
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Individuals with lower credit scores tend to file more claims
Because insurance pricing is based on risk, higher risk typically results in higher premiums.
How Credit Affects Auto Insurance Rates
Your credit-based insurance score can influence several aspects of your auto insurance policy, including:
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Eligibility for preferred rates
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Overall premium costs
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Payment plan options
It is one of several rating factors, along with:
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Driving record
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Claims history
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Location
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Type of vehicle
While it is not the only factor, it can significantly impact what you pay.
How Credit Affects Homeowners Insurance Rates
For homeowners insurance, your credit history may affect:
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Your premium
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Eligibility with certain insurance carriers
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Available discounts
Other factors that impact your rate include:
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Age and condition of your home
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Location
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Claims history
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Coverage limits
What Impacts Your Insurance Score?
Although each insurance company uses its own formula, most insurance scores consider:
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Payment history
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Debt compared to available credit
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Length of credit history
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Recent credit activity
Insurance companies do not use:
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Income
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Race or ethnicity
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Bank account balances
Will an Insurance Quote Affect Your Credit Score?
Getting an insurance quote does not lower your credit score. Insurance companies typically perform a soft inquiry through agencies like TransUnion.
They also do not see the exact same score you see through your bank or credit app. Instead, they generate a score specifically for insurance purposes.
What If Your Credit Has Been Impacted?
If your credit has been affected by a major life event, you may still have options. Many states allow exceptions for situations such as:
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Divorce
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Medical hardship
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Job loss
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Identity theft
If this applies to you, ask your insurance agent about a possible review of your policy.
The Bottom Line
Your credit history can influence your home and auto insurance rates, but it is only one part of the overall pricing process.
Improving your credit over time may help lower your insurance costs. It is also a good idea to review your policies regularly, especially if your credit profile has improved.
If you want help understanding how your credit impacts your insurance or would like a coverage review, contact Gallen Insurance today.
