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How Bad Credit can Drive Up Insurance Rates

November 17, 2021

How Does Bad Credit Impact Your Insurance Rates?

Unfortunately, your credit score impacts a lot of your financial decisions as an adult. With an excellent credit score (800 or more), you'll have no trouble getting a loan or being approved for a line of credit. However, anything below 700, and lenders might start giving your finances a second and double look before offering you a loan. Or you'll be offered a loan with higher interest rates than that of someone with a better credit score.

Long story short, your credit score is king, and its reaches can go beyond just qualifying for a loan or line of credit. Having poor credit can also mean being charged higher insurance premiums, too.

While the reasoning behind charging higher insurance rates to people with poor credit aren't entirely crystal clear, research has demonstrated a relationship between higher premiums and lower credit scores.

Difference in Insurance Premiums for Poor, Average, and Excellent Credit

InsuranceQuotes conducted a study of how credit scores impact insurance premiums. They found that people with average credit may be charged homeowners insurance premiums that are as much as 36% higher than the rates charged to people with excellent credit scores. What's more, people with poor credit were found to have rates that were as much as 114% higher than those with excellent credit.

Consumer Reports analyzed the impact of bad credit on auto insurance rates. It found that each insurance company selectively chooses around 30 data points from each person's credit report to create a proprietary insurance score using an algorithm. However, the insurance scoring process is opaque, and most consumers do not understand which factors will have the greatest effect on their automobile insurance premiums.

Because of state insurance regulations, the impact of a poor credit score on your automobile insurance rates will vary based on where you live. People with average credit scores were found to pay from $68 to $526 more per year than people with excellent credit. 

Why Do Insurance Companies Charge Higher Premiums to People With Bad Credit?

The credit reporting agencies calculate credit scores to predict how consumers will behave. The standard score that is checked by most creditors and insurance companies is the FICO score. This is a score created by the Fair Isaac Corporation that is meant to show the likelihood that you will default on your debts. When you apply for credit, the lenders will use your score to help determine the risk you pose as a customer.

Your insurance score is different from your credit score because the scoring process only relies on certain factors contained in your credit report. Insurance companies create scores to determine the likelihood that you will file an insurance claim because of a loss.

Some states do not allow insurance companies to use insurance scoring, but it is allowed in a majority of states. The insurance score is credit-based but cannot use factors such as where your home is located, your age, marital status, gender, color, or race. However, insurance companies might use some of these factors in other ways when they calculate insurance premiums.

Does Having Bad Credit Make You Likelier to File Insurance Claims?

Your credit score is used by lenders to determine how responsible you are. Some employers might ask for your credit report before extending job offers because of this notion. However, there isn't a solid correlation yet regarding whether or not financial irresponsibility relates to being an irresponsible driver or homeowner. 

The Federal Trade Commission reports that credit-based insurance scores do predict the likelihood that people will make claims against their insurance policies. However, the FTC states that the reason why these scores are predictive is unclear.

Insurance companies also use credit-score-based data in different ways so there's no clear way to compare one with the other. To make matters worse, consumers do not have access to the insurance scores that their insurers use to determine their premiums, making it difficult for people to know what to do to reduce their insurance rates by improving their credit.

Relying on insurance scores to calculate premiums can place an unfair disadvantage on people who have lower incomes. As if that's not enough, charging lower-income people at higher rates can also make it harder for them to improve their credit. 

How to Improve Your Credit and Decrease Your Insurance Premiums

If you improve your credit score, it should lead to a better insurance score. However, the relationship might not be one-to-one. You can try to improve your credit score by taking several steps, including:

  • Making sure to submit your bills before their due dates.
  • Try paying more than the minimum required payments.
  • Working to reduce your debt-to-income ratio.
  • Keeping your accounts open to establish a longer credit history.
  • Making sure to get copies of your credit reports at least once per year and challenge any errors you find.

While you are working on improving your credit, you can also shop around to find lower insurance rates. Different insurers use different scoring methods, and you might receive wildly different premium quotes when you shop around. Aim to get insurance quotes from at least three companies.

If you have a Check 'n Go loan, then you also have free access to the TransUnion CreditView Dashboard through your Pocket360 account. To access it, simply log on to Pocket360, find the Benefits & Rewards section for access to the dashboard, and set-up your TransUnion account to check your vantage score for free.

With work, you can improve your credit score and decrease the insurance rates that you might be forced to pay.

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