Credit scores are used to approve many of your applications, from credit cards to loans and sometimes even employment. Who knew insurance companies would use your credit score to price your insurance premiums?
Auto insurance, homeowner’s insurance, and renter’s insurance all look at your credit score as part of the criteria for deciding how much you should pay for coverage. If you have a low credit score, you’ll end up paying more for insurance than those with a higher credit score.
Why Insurance Uses Credit Scores
When it comes to insurance, providers say there’s a relationship between a person’s credit history and the possibility of filing a claim. They say a person with a lower credit score is more likely to file a claim than one with a higher credit score. It doesn’t seem to matter if you have don’t have a history of filing claims or if you’ve been a long time customer of the insurance company, miss a few credit card payments and you’ll likely see your insurance rates go up.
Critics of the practice say credit history is a poor predictor of insurance claims. Many also believe basing insurance premiums on credit history unfairly punishes minorities and young people.
In a statement to Associated Press, Michigan Senator, Martha Scott stated, “Time and time again studies have shown that credit reports are unreliable and are not good barometers of a person's insurability. I believe insurance companies use this method to cherry pick the more financially attractive customers and to punish our low-income consumers."
Insurance Companies Use a Different Credit Score
The credit score used by insurance companies is different from the one used by banks. Instead, insurance companies use an insurance credit score that’s specific to their industry. You can purchase a generic version of your insurance credit score from TrueCredit.com, a subsidiary of TransUnion. TransUnion is one of the three major credit bureaus.
According to a disclaimer on the TrueCredit website, state information is used along with your credit information to calculate your insurance credit score.
Free Credit Report for High Insurance Rates
If an insurance company gives you a higher rate based on information in your credit report, they are required by the Fair Credit Reporting Act to notify you of this fact. They must include the reason your rate is higher, for example, “You have one or more late payments within the past 24 months.”
You are also entitled to a free copy of the credit report used in the decision. You will have 60 days to obtain this credit report. If your insurance quote was based on inaccurate information in your credit report, you can make a credit report dispute with the credit bureau and request a new quote from the insurance company.
