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How your credit history affects your home and car insurance rates

Filing an insurance claim will increase your rates, but you might not know that poor credit can lead to even higher insurance rates. 

Having bad credit doesn't automatically mean that you're a risky driver or careless homeowner. However, insurers see your credit as a factor.

credit scoring

Insurers use credit scores to identify consumers who are consistent and reliable, such as paying their bills. Insurers say these people are less likely to file a claim on an insurance policy -- thus costing the insurance company less money.

"A consumer's credit history is one of the most, if not the most, accurate predictors of risk available to insurers," said P.J. Smith, senior director, insurance, LexisNexis Risk Solutions. 

Smith added that insurers look to predict loss. Someone who may file more claims will cost them more. So, insurers charge higher rates for people worse credit. 

“A person's credit history is used in credit-based insurance scores to provide an objective and consistent tool that insurers use, along with other applicant information, to better predict a consumer's risk and the likelihood of experiencing a future loss,” Smith said. 

 

How does credit history impact insurance costs?

Insurance companies use insurance risk scores, which are similar to credit risk scores, to determine your insurance risk. The Insurance Information Institute (III) said, statistically, those with poor insurance risk scores are more likely to file a claim.

Smith said credit-based insurance scores gauge a customer’s risk. However, how the insurer weighs that information varies. 

"Each insurance company makes underwriting decisions based on its own business requirements. Depending on a company's own proprietary strategies, they are likely to evaluate credit-based insurance scores alongside many other variables to ascertain if a consumer has a higher risk of experiencing a loss,” Smith said. 

Your credit information influences both your insurance risk scores and credit risk scores. However, consumers shouldn’t confuse the two. 

"Consumers are becoming more familiar with credit risk scoring, but insurance risk scoring is still fairly arcane. The biggest difference is that insurance risk scores look for stability, but credit risk scores look for a reliable pattern. Insurance scores are also more interested in how regularly you pay than in how much you already owe,” said Craig Watts, former public affairs director for Fair Isaac Corp. (FICO). Roughly 300 insurers use FICO’s insurance risk scores to calculate insurance quotes

Insurance companies are adapting. Companies, such as State Farm and Allstate Insurance, have noted the correlation between credit scores and claims and have tailored its own insurance risk-scoring systems as part of their pricing.

"Credit-based insurance scores help streamline the decision process, so policies can be issued more efficiently," Smith told Insure.com. "By predicting the likelihood of future losses, insurers can control risk, thereby enabling them to offer insurance coverage to more consumers at a fair cost."

 

Why does credit history affect insurance costs?

Several studies have shown that a person with a bad credit score will file an auto or homeowners insurance claim. 

A 2013 study published by the Bureau of Business Research at the University of Texas showed that there is a strong correlation between credit history and filing auto insurance claims. Credit scores were matched with claim data in the study. It found that people with bad credit scores claimed losses 53% more than the average.

"People who manage their finances well tend to also manage other important aspects of their lives responsibly, such as driving a car," said Loretta Worters from the III. "People who manage money carefully may be more likely to have their car serviced at appropriate times and may also more effectively manage the most important financial asset most Americans own -- their house -- making routine repairs before they become major insurance losses."

Statistics show a correlation, but critics don’t believe a person’s credit should lead to a denial or higher rates. Birny Birnbaum, executive director of the Center for Economic Justice, has testified before Congress on insurance credit scoring and outlined reasons it should be prohibited. 

He argues that credit-based insurance scores are arbitrary and unrelated to how well a consumer manages their finances. He said that scores penalize consumers due to lenders’ business decisions. He added that 87% of family bankruptcies result from job loss, major medical bills and divorce.

"It is only in the cloistered world of insurance actuaries and executives that charging higher auto and homeowners insurance rates to someone who has suffered an economic or medical catastrophe is considered fair," he told Insure.com.

 

How credit affects your insurance

While Fair Isaac Corp. will not release the details of its insurance risk-scoring model to the public, Watts says that your credit score can give you an idea of your insurance risk score.

The five categories of your credit score are:

  • Past payment history (approx. 35%)
    How you've paid your credit bills in the past, if your bills have been paid on time, items in collection, the number of "adverse public records" (bankruptcy, wage attachments, liens), and the number and length of delinquencies or items in collection.
  • Amount of credit owed (approx. 30%)
    How many accounts have balances, what kind of accounts they are and how close you are to your credit limits.
  • Length of time credit established (approx. 15%)
    How long you have had credit accounts and how long you have had specific accounts.
  • New credit (approx. 10%)
    Number and proportion of recently opened accounts, the number of credit inquiries, and the reestablishment of positive credit history after payment problems.
  • Types of credit established (approx. 10%)
    The number and activity of various types of credit accounts including credit cards, retail store accounts, installment loans, and mortgages.

Insurers place importance on the factors that show long-term stability, so by demonstrating responsible use of credit and keeping your balances low, you should be able to improve your insurance score. That could translate into lower insurance premiums if you've been impacted by a negative credit history in the past.

 

Which states don't allow insurers to take credit history into account?

Most states allow credit scores to factor into insurance rates, but there are a few exceptions:

  • California and Massachusetts don't let insurers take credit history into account when determining insurance rates. 
  • Hawaii doesn't allow its use for auto insurance.
  • Maryland won't allow insurers to take credit history into account when determining home insurance rates. 
  • Florida lets insurers only partially base rates on credit history. So, people with poor credit only pay an average of 3.6% more than those with excellent credit.

"Keep in mind, each insurer has to file its rates and have them approved by each state (Department of Insurance), who ensure they meet all actuarial and regulatory requirements working on behalf of consumers in these states," said Smith.

 

Credit history and auto insurance

Credit is a determining factor, but many other pieces go into an auto insurance rate, including:  

  • Location
  • Age and experience of drivers
  • Make, model and age of vehicle
  • Miles driven annually
  • Your insurer

If you're in a state that allows credit-based insurance scores to influence rates, you’ll pay more for car insurance if you have poor credit. 

"Credit will increase the cost of auto insurance if you have not maintained good credit history," said John Espenschied, agency owner, Insurance Brokers Group. "You can have a clean driving history with no driving violations or accidents, but still be penalized for poor credit, which means higher insurance premiums. Credit is an accurate means for insurance companies to be able to predict adverse selection and adjust the premium based on potential claim risk. The same would apply when obtaining a credit card or home loan -- your credit will determine what you will pay."

Your credit history also dictates a lender’s loan rates. The better your credit history or credit score, the better or lower the interest rates you'll be charged.

How much can you save by having a better credit score? 

  • 71% -- A person with good credit pays 71% less for car insurance than someone with poor credit.
  • 18% -- A person with fair credit pays 18% less for car insurance than someone with poor credit. 

"You can ask your insurance company if a credit-based insurance score was used to underwrite and rate your policy and which risk category you were placed in after you receive a quote,” Worters said. 

Rate increases vary by insurer and state. Michigan is worst for drivers with poor credit. Drivers in that state pay an increase of nearly $4,000 more than the state's average. Drivers with poor credit in many states pay double what is charged to people with good credit. 

Here are the differences by state for auto insurance:

StateAverage rateRate with poor credit% increase$ increase
Michigan$2,368$6,316167%$3,948
New Jersey$1,419$2,925106%$1,506
Arizona$1,399$2,71194%$1,312
Texas$1,644$3,17093%$1,526
Utah$1,212$2,31691%$1,104
Nevada$1,578$2,98689%$1,408
Illinois$1,176$2,19887%$1,022
New York$1,214$2,25586%$1,041
Minnesota$1,339$2,47185%$1,132
Pennsylvania$1,438$2,57279%$1,134
Vermont$1,166$2,07078%$904
South Carolina$1,353$2,38676%$1,033
Alabama$1,304$2,29676%$992
Tennessee$1,339$2,34275%$1,003
Florida$2,250$3,92674%$1,676
Maine$884$1,54074%$656
Rhode Island$2,011$3,49674%$1,485
Montana$1,589$2,75673%$1,167
Colorado$1,675$2,89073%$1,215
Kentucky$1,611$2,76672%$1,155
Nebraska$1,287$2,20371%$916
Idaho$1,019$1,74271%$723
Indiana$1,057$1,80671%$749
Missouri$1,288$2,19771%$909
Louisiana$2,228$3,79770%$1,569
Delaware$1,838$3,12870%$1,290
South Dakota$1,250$2,11970%$869
Arkansas$1,556$2,62168%$1,065
Oklahoma$1,469$2,46868%$999
Ohio$959$1,61068%$651
Georgia$1,815$3,04067%$1,225
DC$1,887$3,15367%$1,266
North Dakota$1,123$1,87367%$750
Oregon$1,325$2,19366%$868
Kansas$1,412$2,32064%$908
Washington$1,307$2,11762%$810
Iowa$1,073$1,72861%$655
Virginia$993$1,59561%$602
New Mexico$1,498$2,40460%$906
Maryland$1,541$2,46460%$923
Wisconsin$1,147$1,83260%$685
New Hampshire$1,156$1,84660%$690
Mississippi$1,504$2,35857%$854
Connecticut$1,980$3,09556%$1,115
West Virginia$1,467$2,16748%$700
Alaska$1,246$1,78944%$543
Wyoming$1,577$2,17938%$602
North Carolina$1,170$1,31713%$147
California$1,783$1,7830%$0
Hawaii$1,255$1,2550%$0
Massachusetts$1,616$1,6160%$0

 

Credit history and home insurance

Credit history is one of many factors used by carriers to calculate the potential risks and price a home insurance policy.

Other factors that play a part in home insurance costs are:

  • The type of home
  • Location 
  • Claims history
  • Closeness of a fire hydrant
  • Fire suppression and alert systems

"There is an insurer for every type of risk, and there is the right rate for every risk. Non-standard insurers are also an option for some consumers,” said Smith. 

Of course, home insurance claims can increase your rate. 

However, the only thing that can increase your premium more is bad credit:

  • Homeowners with poor credit pay an average of 127% more for home insurance than someone with excellent credit. That’s roughly $1,700 more annually.
  • People with fair credit pay on average 34% more than those with excellent credit. That’s $425 on average. 

Here are the averages by state (note: California, Maryland and Massachusetts aren’t included since they don’t allow insurers to base home insurance rates on credit history). 

State

Avg. premium for excellent credit

Avg. premium for fair credit

Avg. premium for poor credit

Avg. difference between excellent and poor credit

Alaska

$837

$1,168

$2,133

$1,296

Alabama

$1,460

$2,617

$3,955

$2,495

Arkansas

$2,067

$3,151

$5,893

$3,826

Arizona

$1,145

$1,775

$2,779

$1,634

Colorado

$1,926

$2,665

$4,012

$2,086

Connecticut

$1,163

$1,496

$2,271

$1,108

Delaware

$694

$924

$1,547

$853

District of Columbia

$706

$1,018

$1,726

$1,020

Florida

$4,798

$4,841

$4,913

$115

Georgia

$995

$1,833

$3,105

$2,110

Idaho

$786

$1,083

$1,714

$928

Illinois

$919

$1,428

$2,582

$1,663

Indiana

$987

$1,881

$4,285

$3,298

Iowa

$1,135

$1,911

$2,754

$1,619

Kansas

$2,540

$4,221

$8,175

$5,635

Kentucky

$1,513

$2,216

$3,686

$2,173

Louisiana

$2,011

$2,841

$4,158

$2,119

Maine

$684

$988

$1,542

$858

Maryland

$1,166

$1,244

$1,379

$213

Michigan

$871

$1,413

$3,577

$2,706

Minnesota

$2,178

$2,154

$3,507

$2,353

Missouri

$1,556

$2,343

$4,083

$2,527

Mississippi

$1,057

$2,957

$4,631

$2,453

Montana

$1,610

$2,614

$5,266

$3,656

 Nebraska

$1,525

$2,283

$4,201

$2,676

Nevada

$782

$1,179

$2,420

$1,638

New Hampshire

$607$949$1,673$1,066
New Jersey$1,003$1,274$1,751$748
New Mexico$1,560$2,192$3,531$508
New York$860$1,051$1,368$1,638
North Carolina$1,463$1,890$2,673$1,210
North Dakota$1,159$1,925$2,460$1,301
Ohio$923$1,630$3,943$3,020

Oklahoma

$2,172

$3,202$6,277$4,105
Oregon$591$1,163$2,460$1,869
Pennsylvania$663$1,157$2,515$1,852
Rhode Island$1,161$1,465$2,071$910
South Carolina$1,230$2,178$3,073$1,843
South Dakota$1,370$2,519$4,877$3,507
Tennessee$1,574$2.980$5,197$3,623
Texas$2,259$3,344$5,805$3,546
Utah$591$1,082$1,371$780
Virginia$855$1,255$2,040$1,185
Vermont$576$779$1,170$594
Washington$804$1,098$1,664$860
Wisconsin$668$984$1,621$953
West Virginia$1,191$1,762$3,679$2,488
Wyoming$1,021$1,306$1,747$726

 

How often do insurance companies check credit history?

When insurance companies check credit history varies. A majority of companies pull checks when quoting a new applicant and when a customer renews. Most carriers run another check if there are regulatory requirements. These requirements vary by state. Some companies implement a process to re-run your credit-based insurance score every few years.

Check with your insurance agent if you’re concerned about this.

"Credit history data is dynamic and can change over time," said Smith. "Because of this, carriers will refresh the credit-based insurance score of a policyholder. A common practice is every two to three years at renewal. Also, some states have requirements for ‘at the insured's request’ where a policyholder can ask to have their score re-run."

 

What to do if you have poor credit

Since risk underwriting is the core point of differentiation between insurance companies, it's important that those with a poor credit score shop around and compare rates.

"Some will weigh credit information heavily while others may ignore it altogether," said Kevin Haney, who owns A.S.K. Benefit Solutions and has more than a decade of experience with Experian. "Some companies even advertise that they do not check credit. Again, poor credit people should shop around and get multiple quotes to find the best rates."

Don’t fret if you have a poor credit history. Here are several tips courtesy of III:

  • Pay your bills on time. Delinquent payments and collections can hurt your score.
  • If you have missed payments, get current and stay current. The longer you pay your bills on time, the better your score.
  • Be aware that paying off a collection account won’t remove it from your credit report. It will stay on your report for seven years.
  • If you’re having trouble making ends meet, contact your creditors or see a legitimate credit counselor. This won't improve your score immediately. However, if you can begin to manage your credit and pay on time, your score will get better over time.
  • Keep balances low on credit cards and other "revolving credit." High outstanding debt can affect a score.
  • Pay off debt rather than move it around. The most effective way to improve your score in this area is paying down your revolving credit.
  • Don't close unused credit cards as a short-term strategy to raise your score. In fact, owing the same amount but having fewer open accounts may lower your score.
  • Don't open many new credit cards that you don't need merely to increase your available credit. This approach could backfire and actually lower your score.
  • If you have been managing credit for a short time, don't open new accounts too rapidly. New accounts will lower your average account age, which will have a larger effect on your score if you don't have a lot of other credit information. Also, rapid account buildup can have a negative score impact for a new credit user.
  • Open new accounts with due diligence. Paying them off on time will raise your score in the long term.
  • Do your rate shopping for a given loan within a focused period. Insurance scores distinguish between a search for a single auto or mortgage loan and a search for many new credit lines, in part by the length of time over which inquiries occur.
  • Re-establish your credit history if you have had problems. Opening new accounts responsibly and paying them off on time will raise your score in the long term.

Credit history plays a vital part in your auto and home insurance rates. However, by working on your credit, you can save hundreds each year. 

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