Your Bad Credit Is Costing You Big Money When It Comes to Your Insurance
- Capitals & Squares Llc
- May 26, 2015
- 3 min read
You know that your credit score determines what you're going to pay on your credit cards, mortgage and car note. But did you know that your credit score also impacts what you pay for insurance? In fact, insurance companies have proprietary credit scores to help them determine how much you're going to pay. But why? And what, if anything, can you do about it?
Why You Have an Insurance Credit Score
"Insurance companies have their own credit scores," says John Heath, directing attorney with LexingtonLaw. "The primary reason is that they're looking to see whether or not it's likely that they're going to pay out." Thus, your credit score isn't being used just because. Insurance companies use actuarial tables to determine risk for large groups. At some point, someone figured out that people with poor credit were a higher payout risk than people with good credit. "If you're not responsible with your finances, how responsible will you be while driving a car?" asks Heath.
However, the information can't be used in every state. California and Massachusetts are two states that don't allow insurance companies to use your credit information. And according to Gerri Detweiler, director of consumer information at Credit.com, insurance companies are quick to say they don't use them for determining rates per se. Rather, the insurance companies claim they use them for determining discounts. It's a subtle difference and one that might not make much difference to you when you're paying your premium every month.
How Important Is Your Credit Score?
Detweiler also points out that your credit score is by no means the primary factor when it comes to determining how much you're going to pay for insurance. "The discounts can be decent, but your credit score isn't the major factor," she says. "In the case of auto insurance, your driving history is more important." Your ZIP code will also play a major factor in determining insurance premiums.
Now you might be worried not only that you're paying too much for insurance because of bad credit, but also that getting insurance will negatively impact your credit because of the inquiry. Detweiler says that you shouldn't worry about that, however. "The inquiry insurance companies generate is a 'soft' inquiry," she says. "That means it won't have any impact on your credit score. Don't avoid shopping for insurance, because you think it's going to impact your credit score. It won't make any difference."
How Much More Are You Paying for Poor Credit?
Detweiler herself was shocked that she didn't qualify for a discount on her insurance. She found out because insurance companies are required to notify you any time they take "adverse action." They have to tell you why and where they got the information from. She missed the discount by just a few points. The discount wasn't much. Just $100 for the whole year.
"It was $100, which isn't huge, but I'd obviously rather that in my pocket than send it to the insurance company," Detweiler says. She says she talks to people all the time who say they have great credit but aren't getting insurance discounts.
If you have great credit and aren't getting insurance discounts -- or even if your credit is not so great -- it's probably time to start looking into your credit report. You wouldn't be the first person to not know there's unflattering information in your credit report that's not actually supposed to be there. So check your credit report, remove what you can and call up your insurance company. You just might be able to get one of those lower rates -- er, "discounts."
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