You probably know that lenders use information in your credit report to determine
if they'll give you credit. But did you know that in some states, insurance companies
also consider your credit history? Good or bad, your credit history may affect your
ability to purchase homeowners or auto insurance coverage and help determine what
premium you'll pay.
For example, consider these scenarios:
- Two years ago, you were unemployed for six months. Before you could find a new job,
you fell behind on several credit card payments. Now your auto insurance rates are
going up, even though you've never filed a claim against your policy.
- You've always paid your bills on time, and you've always paid cash instead of applying
for credit. Why could this be a problem? Similar to when you apply for a mortgage
or credit card, your lack of credit history means you’re an unknown quantity – there
is no history of monthly credit card payments.
Many people believe that only their driving record is important, but that’s simply
not the case. The majority of auto insurance companies consider credit to be a very
important rating variable.
Insurers have always used various criteria to determine who to insure and at what
rates. For example, if you're applying for auto insurance, your insurer might consider
your age, driving record, make and model of your car, and how many insurance claims
you've filed in the past. But within the last decade, insurance companies have also
begun using credit information as an additional factor to help predict which persons
pose more risk. Insurers believe that the healthier your credit history, the less
likely you are to file a claim against your auto or homeowners insurance policy.
And the more likely you are to pay your insurance premium payments.
If your credit history (along with other factors considered) suggests that you are
likely to be a responsible driver, you may be offered a lower premium. But if your
credit history is tarnished--or if you have little or no credit history--you may
pay higher premiums for the coverage you're offered. You may even be denied coverage
If you're denied insurance coverage because of your credit history, the federal
Fair Credit Reporting Act allows you to order a free copy of your credit report
from the bureau used by the insurance company who denied you. If you feel the information
provided to the credit bureau is incorrect, you can dispute it.
If you've been turned down for insurance, this may feel like too little, too late.
But if your credit history is affecting your ability to get auto or homeowners insurance
(or the premiums you're charged for it), here are a few things you can do:
- Clean up your credit immediately. Pay your bills on time every month, get rid of
the high interest credit cards, and don’t spend beyond your means.
- If you don't have any credit, get some. Your lack of history is what's hurting you;
to the insurance companies, you're an unknown quantity. Although you don't want
to run up excessive debt, you do want to show that you can use credit responsibly.
Use your credit regularly, and always make your monthly payments in a timely fashion.
- Once a year, get copies of your credit report from all three major credit bureaus.
(The information contained in one report may not be reflected by the others.) Make
sure the information on them all is correct. Dispute any errors with both the creditors
and the credit bureaus involved.
- Shop around for insurance. Depending on the insurer, prices for the same coverage
can vary substantially.
- Consider higher deductibles to save money. For both homeowners and auto insurance,
higher deductibles can lower your premium costs. Just make sure you can cover the
deductible should you be faced with a claim.
For now, the use of credit reports is an industry standard. Make your credit work
for you by watching it closely. In most cases, you may be rewarded with lower premiums
if you do so.