How Credit Scores Affect Insurance Premiums

A high credit score may help consumers access the most favorable mortgage loans, job opportunities and — in some cases — insurance premiums.

Many insurers believe that the way consumers manage their personal finances is a predictor of the number of claims they'll file. Individuals with lower scores may present a higher risk to an insurance company and, consequently, may be offered higher rates. Furthermore, those with high credit scores may be able to cut costs on homeowners or auto insurance.

"That's important, especially in today's economy," said Loretta Worters, a vice president with the Insurance Information Institute (III).

Maintaining your credit score for your insurance score

The III recommends that consumers go beyond the protections provided by the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009. Paying bills on time, maintaining a low balance-to-credit-limit ratio, and paying off balances on cards with high-interest rates first may contribute to a higher score, according to the report.

Consumers may also want to take advantage of credit reports available to them through the three credit bureaus. Federal law mandates that TransUnion, Experian and Equifax each provide one free credit report to every consumer (at the consumer's request) during a 12-month period. Viewing these can help consumers to locate mistakes or fraud, take action if there are concerns, and protect their credit scores, according to the report.

While many people do not realize the benefit of credit-based insurance scoring, more than half have lower premiums because of it, according to the III.

The argument against credit scoring

Some consumer advocates are also opposed to this practice. Washington state insurance commissioner Mike Kreidler recently proposed a ban on credit scoring, saying that it was inherently unfair, given the economic circumstance that many consumers currently face.

Washington state's unemployment rate increased from 9 percent in November 2009 to 9.5 percent in December, according to the Bureau of Labor Statistics. These conditions may cause consumers to fall behind on credit card and mortgage payments and damage their credit scores. Still, it was never proven that people with low scores file more claims, according to Kreidler.

"Despite disclosure requirements, credit scoring remains a secretive process," he said in the proposal. "It's nearly impossible for consumers to determine how their credit history impacts how much they'll pay for coverage."

Washington state lawmakers rejected Kreidler's bid, citing a belief within the insurance industry that credit-based scoring is predictive of risk. The state continues to have an "adverse actions" policy that allows insurers to deny new coverage or policy renewal if an individual has a low score. The company must provide the consumer an explanation for this action, as well as advice on how to improve his or her score.

Other states employ similar disclosure rules and limits on use, restrictions against penalizing consumers without credit history, sole use and more.

Read More About Credit Scores

• How missed and late credit card payments affect your credit score
• Your Credit Score: How Your Credit Cards Influence It
• The Relationship between Credit Scores and Age
• Credit Scores vs. FICO VantageScores
• Why Each Credit Bureau Has Its Own Credit Score
• Medical Bills Don't Have to Ruin a Credit Score
• Chapter 7 or 13 Bankruptcy Can Affect Credit Scores
• Ordering Your Credit Score From a Credit Bureau
• What is a Bad Credit Score?
• Factors That Damage Your Credit Score
• What Is a Good Credit Score?
• Credit Score Myths
• How Credit Scores Are Calculated
• Why You Need to Know All Three Credit Scores
• What Are the Three Credit Bureaus?
• How Credit Scores Affect Insurance Premiums
• Student Habits That Kill Your Credit Score
• Store Credit Card Application Could Damage Your Credit Score
• International Credit Score
• What A Credit Card Balance Does to Credit Scores
• How a HELOC Affects Your Credit Score
• Medical Credit Score
• Your Credit Score May Be Worse Than You Think
• FICO - What is Coming in 2009
• Credit Score Ranges
• Five Parts to Your FICO Credit Score
• How Corporate Cards Affect Your Personal Credit Score
• Who Wants to Know Your Credit Score
• Credit Rating - How Your Credit Gets A Score
• Credit Line and Your Credit Score