How Credit Score Affects Insurance Premiums


How Credit Score Affects Insurance Premiums

Your rates could rise if your credit score declines. Here's what you can do.

Our auto-insurance company increased our premiums by $150 per year based on our credit score. Can it do that?

It certainly can, in most states. In fact, many insurers changed their pricing models over the past few years to make credit scores a much larger factor in setting auto- and homeowners-insurance premiums. That's one reason it's important to monitor your credit report and keep a good credit score at all times -- even when you aren't about to buy a house or car.


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It might seem that credit scores would have nothing to do with insurance. But insurers have found a strong correlation between credit scores and claims: People with low scores are a lot more likely to file insurance claims than people with high scores.

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In 2004, the Texas Department of Insurance conducted its own study to see whether this was true. After studying the claims records of two million insurance policies, the insurance department found "the difference in claims experience by credit score was substantial," according to the regulator's report. The 10% of policyholders with the worst credit scores were 1.5 to 2 times more likely to file a claim than the 10% of policyholders with the best credit scores, for both auto and homeowners insurance. They also found that drivers with the best credit scores are involved in about 40% fewer accidents than those with the worst credit scores.


But because of the current economic situation, some states have recently adopted laws requiring insurers to let people request an exception to the credit-based rating because of "extraordinary life circumstances" that affect their credit score -- such as a serious illness or injury to themselves or an immediate family member; death of a spouse, child or parent; divorce; identity theft; temporary loss of employment for three months or more; or military deployment overseas.

"Many companies had an appeals process through which you could explain why your credit was tough and you could get special dispensation, but this formalizes it," says Wes Bissett, senior counsel, government affairs, for the Independent Insurance Agents and Brokers of America. Texas, Delaware, Louisiana, Montana, New Mexico and Illinois have adopted laws granting this type of appeal; other states are expected to follow suit.

But even if you live in a state that hasn't adopted this law, Bissett says it doesn't hurt to let your agent or insurer know upfront about any special circumstances that have affected your credit score -- even before you apply for a policy (you can find an independent agent at "If they know in advance, they might be able to reach out to the company or focus on companies that might work better for that particular person," he says.

Some insurers count your credit score a lot more than other insurers do when setting rates. A few companies might offer particularly good deals for people with low scores, and the reverse can be true, too: "If you have a less than sparkling driving history and accidents that aren't of a horrible nature, there are some companies that are more willing to overlook those because of a strong credit history," says Bissett. Also, some companies check your credit score only when setting your rate as a new customer; others review your score once a year.


The credit score the insurer uses is actually a bit different from the credit score a potential lender uses -- usually a proprietary "insurance score" with a formula that the company doesn't publicly disclose. But you can take the same key steps to improve your credit score and your insurance score: Check your credit report at You can get a free copy of your report from each of the three credit bureaus every 12 months; stagger your requests so that you see a copy every four months. Fix any errors on your report promptly. Also be sure to pay your bills on time (if you can't make the full payment, at least pay the minimum by the deadline), try to keep your charges below 25% of your available credit (even if you pay the bill in full by the deadline), and don't open or close a lot of cards at once. See Five Ways to Boost Your Credit Score and Demystifying Your Credit Score for more information.

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