If you’re looking for ways to cut your insurance costs, don’t forget to review your credit score. Having bad credit doesn’t make you a risky driver or careless homeowner. However insurance companies have found enough patterns to use the information in your credit report to affect the premiums you pay.
According to the Insurance Information Institute (III), insurers have created a formula from credit information to establish an “insurance risk score”. They believe this score helps them to determine how likely you are to file an insurance claim. Your premiums may go higher if you have a bad credit score, even if you haven’t filed a claim. Statistically, people who have a poor insurance score are more likely to file a claim, according to III.
Insurance risk scores are not the same as credit risk scores, but they are similar. Your credit score weights five characteristics – past payment history, amount of credit, length of time credit is established, new credit, and types of credit. Credit scoring gives the highest weighting to past payment history. Bankruptcy, items in collection, and the number of delinquencies will all hurt your credit score. Insurance scores use the same characteristics, but weight them differently. The length of time credit is established and paid on time shows insurance companies that you are stable and responsible with money. This tells insurers that you are consistent and reliable and statistically will be less likely to file a claim on an insurance policy.
You may not agree with this practice and not all insurers use credit information to set premiums. However, if you can demonstrate that you use credit responsibly and keep your balances low, your insurance score will improve. That could translate into lower insurance premiums for your coverage.