We’ve talked in prior blogs about the price of insurance and how it’s calculated. We know there are many factors that go into determining your insurance premium. But today we’re going to talk about only one of those factors. It’s an exciting factor. It’s actually a factor that gets some people really upset.
Today we’re going to talk about credit and how your credit score affects your premium.
Table of Contents
Which Insurance Companies Use Credit For Insurance?
The first thing we’re going to talk about is which companies actually use credit to determine your insurance premium. You might be surprised to know that 92% of all insurance carriers in the United States are using credit when determining your insurance premium.
There are only a handful of insurance carriers and a handful of states, Michigan, Massachusetts, and Hawaii are three of them that I think actually prohibit the practice of using credit when determining your insurance premium. Besides from those few states and a few carriers, everybody in the insurance world is using credit to determine your insurance premium.
What Type Of Credit Do Insurance Companies Use?
One important thing to know is that insurance companies are not pulling your official credit score. So like a 750 credit or a 690 credit or whatever it is. That’s not what insurance companies are pulling, and that’s not what they’re using to determine your insurance rate. They’re essentially using four things to determine your insurance rate through credit.
Those four things are:
- Your Payment History
- Length of Credit History
- Types of Credit You Have
- How Much Debt You Have
Those are the things that insurance companies are looking at. So they’re not looking at your official credit score, like a financial institution may. They’re coming up with their own factors to determine your insurance credit score.
And now, according to the Insurance Information Institute, insurance companies will not use personal information such as gender, your job, your income history, or any other personal information like that, to determine your insurance credit score.
Can My Broker See My Credit Information?
It’s also important to note that insurance agents and brokers like ourselves don’t get a laundry list of your credit history. We don’t get an insight into your credit history, your financial history. So you don’t have to worry about some random insurance broker running your credit and seeing all of that. We see very little. In fact, anytime we do see something, it’s usually a number scale.
There’s a lot of insurance companies, travelers is one of them, Allstate is one of them, who use a number scale anywhere from like 1 to 30. 1 being the very best, 30 being the very worst credit, but that’s all we see as insurance brokers.
Do Insurance Companies Pull A Hard or Soft Credit Score?
Another question that we get often is – is it a hard, or a soft pull?
Well, we talked about it not being an official credit score, like a financial institution would pull. It’s a soft credit pull. You’re not going to see it show up. It’s not going to affect your credit score. It’s not going to negatively impact and drive your credit down lower. You won’t see any of that happening when you get insurance quotes and they run your credit.
And here’s the thing – just as a very bad credit score can make your premium very high. A really good credit score can help your insurance premium be even better. People with above average credit scores, will pay a lower rate than somebody who does not have good credit.
One important thing to point out is, and again, we’ve talked about this. There are a number of different factors that go into determining your insurance premium. So just because you have a really good official credit score, that is not always going to turn into a really good insurance premium. However, all the other things remaining equal somebody with really bad credit is essentially going to double their insurance rate versus somebody with really, really good credit on the other end of the spectrum is probably going to cut their insurance rate in half.
There is a huge swing in premium between someone with really good and someone with really bad credit.
Why Do Insurance Companies Use Credit?
So now here’s the last question. Why do insurance companies even use credit to determine insurance prices?
It doesn’t make sense. You could have just foreclosed on your home or some other bad thing happened and you have really bad credit, but you’ve never had an accident! So how does that make sense? We hear that often.
Insurance companies use data, they use numbers, they’re not pulling these premiums out of thin air. They use data and that’s how they back up all of the rates that they set. So believe it or not, there actually is data that shows a direct correlation between those people with bad credit and those people that get into accidents often, and those people with good credit tend to not get in as many accidents.
As long as the data continues to back that up and prove that there is a direct correlation, guess what insurance companies will continue to use as a factor when determining your insurance premium?
So what can you do? Well, you’re definitely not going to change the insurance company’s mind, but you can work with a professional or work with whoever to get your credit score better and you will see over time as your credit gets better, a decrease in your insurance premium.