I’m often asked how and why a persons credit rating affects insurance rates and figured this was an excellent question that maybe I could share some insight about for our readers.
There are many factors that are used to help determine the rate we pay for insurance, especially for home and auto insurance, but also for commercial and various other polices purchased. Common factors are marital status, age, gender, length of time with prior carrier, prior limits of liability, any previous lapses in the last 60 months, driving and licensing violations, at-fault and not-at fault accidents, claims history including claims frequency, whether you own a home or rent, rating zip code, youthful and/or elderly household drivers, potentially excluded drivers, financed vehicles, occupation, and miles driven are just some of the rating factors used. However, your credit score is also a factor and often times has a substantial impact on your rate. In fact, one underwriter I spoke to recently said that if they could only use either driving record or credit as a rating factor, they’d easily use credit over driving record.
Before becoming an agent, I would have completely disagreed with why credit would impact rates, but it’s statistically proven that those with higher credit ratings file fewer claims, and the fewer claims a carrier has to pay, the more competitive their rates can be.
Most commonly, a carrier only uses the credit score in combination with other factors in the entire household profile to help determine an Insurance Score. Insurance scores are hard to change, so thus the reason that an improvement in a credit score doesn’t necessarily mean an immediate improvement in the Insurance Score. Those with higher Insurance Scores have a less or a propensity to file claims. At the end of the day, in the short term, there’s not much we can do about our Insurance Score as it only gradually improves with time, but can easily drop quickly with added claims activity or other factors. Insurance companies have increasingly been using credit to help rate policies for years now and that’s not likely to change any time soon.
When an insurance company “pulls your credit”, it’s not like a mortgage company or credit card company “pulling your credit”. Insurance companies do what’s called a “soft inquiry” which means there is no negative effect to your your credit as a result of an insurance company looking at it whereas a “hard inquiry” does affect your credit score.
As I mentioned above, most insurance companies use credit as part of the criteria to develop an insurance score and then use the insurance score as a means to help rate that policy when a new policy is being written. Most often the carriers don’t re-run that insurance score every year, or every renewal. Most run it every two or three years, but all the carrier’s do it differently. With some carriers, we can request the carrier to re-score the account once during a policy period, but the caveat is if the score comes back lower, then the rates can be negatively impacted and we can’t go back, so we often don’t advise this practice.
Paying attention to your credit ratings is important for many factors. With improved scores, it’s just not helpful for lower insurance rates, but various other entities use credit to determine how much we pay, so be kind to your credit!
We hope this information was helpful! As always, we’d love to hear from you if you have any questions or comments. Remember, as agents, we don’t make the rules, we just try our best to understand the system and impart our knowledge to help our customers.