Have you heard that your credit score can affect how much you pay for insurance?

As a consumer, you probably know everyone has a credit score maintained by three major credit reporting agencies: Equifax, Experian and TransUnion. These firms compile information from financial institutions and retailers, including how much you earn, your current debt and your payment history.

A numerical score is calculated from this information, which is used to predict how much debt you can take on and repay. These scores are often referred to as FICO® scores. This term comes from the name of the leading company in the development of credit scoring, the Fair Isaac Corporation.

The higher your credit score, the more debt you can take on and the more favorable your rates will be. The lower your score, the more limited you will be in the amount you can borrow. Your interest rate and loan terms will likely be less favorable as well.

Insurance applications

In the 1990s, major insurance companies working with the Fair Isaac Corporation began to incorporate credit history and credit scores into “credit-based insurance scores.” They used the information to underwrite and price auto and homeowners insurance.

A credit-based insurance score helps predict the probability that you will file an insurance claim, much as a credit score predicts the probability that you will default. Despite their similarities, there are some important differences between credit scores and credit-based insurance scores:

• Credit scores are an overriding, almost exclusive, factor in loan underwriting. Credit-based insurance scores are one factor among many in insurance underwriting. 
• Credit decisions normally consider your income. Insurers are generally prohibited from considering an applicant’s income.
• You can ask for your financial credit scores from the reporting agencies but obtaining insurance scores for individuals is not as easy. For the most part, credit-based insurance scores are developed and used differently by insurers. Talk to your insurance agent about getting a copy of your insurance score.

Restrictions

Rathbun Insurance along with other consumer advocates have argued that credit history should not be used as a measure of how someone drives or manages their household. There are police and insurance records that provide direct indications of that behavior.

In addition, since credit scores take income into account, critics of credit-based insurance scores argue they contribute to unfair discrimination against lower-income people. In their estimation, a low-income person with a good driving record but a low credit score could be unfairly disadvantaged.

In response, many states have enacted laws or regulations prohibiting insurance companies from using a person's credit record as the sole factor in taking “adverse action” against them. Adverse actions apply to applicants and insureds. Examples include denying coverage and raising premiums. 

Credit considerations have not been entirely eliminated from insurance. However, credit-based insurance scores are still widely used. Key to their acceptance were several studies in the mid-2000s correlating a person’s credit history with their likelihood of making an insurance claim.

What do you do?

Now that credit-based insurance scores are a part of auto and homeowners underwriting and pricing, what should you do?

The answer is simple: Review Rathbun Insurance Road to Standard Auto Insurance Market guide. The "Road to Standard Auto Insurance Market" guide covers essential topics such as:

1. Eligibility Criteria: Learn about the factors that influence your eligibility for standard auto insurance coverage.
2. Rating Factors: Understand how your insurance premium is calculated based on various rating factors, including your driving record, vehicle type, and geographic location.
3. Risk Assessment: Gain insight into how insurers assess risk and adjust premiums accordingly.
4. Making Informed Choices: Armed with this knowledge, you'll be better equipped to make informed decisions about your auto insurance coverage, ensuring that you receive the protection you need at a price you can afford.

We are proud to offer this guide as part of our commitment to education and empowerment. You can’t avoid certain risks, no matter how careful you are. You may not be able to afford a vehicle with the latest safety features, you may have to park your car outside on a busy street, you may live in an area prone to theft and vandalism, or you may not be able to afford the improvements your home may need.

Still, your best approach is to look beyond your credit score to the factors that determine it.

As always, contact your Rathbun Insurance account manager if you have any questions regarding your credit score and how it can affect your premiums.