How Does Your Credit Score Affect Your Insurance Rates

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Insurance Articles by A-1 Auto Insurance

How Does Your Credit Score Affect Your Insurance Rates

Most people are all too aware that a poor credit history will affect their ability to obtain a loan. However, many of these same individuals fail to realize that their credit score also affects the rate they are charged to purchase insurance. The reason is that many insurance companies neglect to explain this to their customers. The end result is a nasty surprise when customers discover that their insurance rates have been increased.

One such case happened to a man named Mathew Williams in New York; he received a notice that his insurance company was increasing his annual premium by $628 as a result of his current credit score. After verifying his actual score online, Mathew discovered that his credit score had dropped to 540 from 680 because of unpaid medical bills following a recent car accident. Therefore, Mathew was forced to pay numerous medical bills, as well as higher premiums for his insurance policy.

Why do Insurance Companies Base Rates on Individual Credit Scores?

Insurance companies calculate risk for each customers and reward individuals who are not as likely to incur a loss by charging them lower premiums. These companies will review your individual credit score, and determine the rate of your insurance based on your current score. The important thing to remember is that insurance companies are evaluating your risk factor, not your ability to obtain a loan.

One insurance research company discovered that a remarkable 92% of the leading 100 auto insurance companies in the United States factored in credit scores when underwriting new insurance policies. Some of the risk-calculating factors they included were collections, judgments, delinquencies and bankruptcies. They also consider the length of a customer’s account history, as well as the various types and numbers of credit accounts they hold. According to research, individuals who do not pay their bills have a higher probability of filing an insurance claim. This is how insurance companies justify their practice of associating increased risk with lower credit scores.

The majority of American auto insurance companies base rates on a customer’s current credit score, and many home insurance companies are beginning to do the same. In fact, the only states that do not allow insurance scoring based on credit are Maryland and California. Each state has its own laws and regulations so where you live will determine what type of information your insurance company can use to calculate your insurance risk and set your premium rates. Policyholders fall under the category of preferred, average or high risk. In order to remove yourself from the high risk category, you should try to remove any negative points from your credit report and increase your score; 300 is the lowest score, with 600 to 650 considered fair and 850 the highest score. This should help you receive a lower insurance rate from your local insurance company.

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