How a credit score can affect your insurance rates

We’ve always known that our credit will contribute to the percentage rate we will get on a car loan or a mortgage, or whether or not we can get the loan at all.

Did you know, however, that your credit can be costing you, or possibly saving you, hundreds of dollars a year on your personal auto and home insurance? That’s right — your credit is now a factor in determining auto and home insurance rates, just like age, driving record, type of car, etc. And in some cases, the costs associated to your credit score can even be in the thousands.

Before we get into the specifics of how your credit score affects your rate, let’s first look at where this all came from.

“What does my credit have to do with my auto and home insurance?” We get that question all the time. This is always a difficult question to answer because on the surface it appears that there is no correlation. However, it has been proven statistically (we all know how much insurance companies love statistics) that your credit score has everything to do with your likelihood of filing an insurance claim. Back in the late 1990s, some of the largest national companies ran studies on their existing clients to see if there was a correlation between credit and claims.

Statistically, the writing was on the wall. One of these companies (who we will refer to as Company A) conducted a study of over 12,000 policyholders. For those with “excellent” credit, the insurance company’s loss ratio was approximately 29 percent. This meant that for every dollar they were bringing in, they were only paying out 29 cents. They were making a killing on these people. On the flip side, for those with very poor credit, the company’s loss ratio was approximately 130 percent. They were paying out $1.30 in claims for every dollar they brought in. These studies dramatically changed the way insurance companies underwrite auto and home insurance.

So just how much will your credit score affect your rates? That depends on how much weight is applied to credit in the company’s rating formula. Some companies use credit as one of their primary factors — like age and driving record — while others look at it as a secondary factor – such as the make of the car or how far you drive to work. Most companies also have different rating tiers as well (highly preferred, preferred, standard, non-standard, etc). If credit is used as a primary factor, it will determine what rating tier you go into, whereas if it is a secondary factor, it will determine how you will be rated within the tier you otherwise would qualify for.

Here’s an actual example: Husband and wife in their early 40s, clean driving records, two vehicles insured with full coverage in the suburbs of Manchester/Nashua. Company A uses credit as a primary factor and company B uses credit as a secondary factor.

Assuming the couple has excellent credit, they will qualify for “highly preferred” with both companies. The annual rate for Company A is $1,062 and the annual rate for Company B is $1,342.

Now let’s look at the same couple with very poor credit. With Company A (uses credit as a primary factor) this insured will only qualify for the worst rating tier. The new annual rate is $5,067, a 500 percent increase. With Company B, the couple still would qualify for the highly preferred tier, but there would be an adjustment within the tier. Company B’s new rate would be $1,853 for the year, which is still a steep increase, but significantly more reasonable than Company A’s.

Based on these rates, it would appear that Company A’s philosophy is that they simply don’t want business with poor credit. They have intentionally priced themselves out of the market for poor credit score business. Company B, on the other hand, still wants to write risks with poor credit, but they will charge more for the policy.

Good, bad or indifferent, this is now a reality in New Hampshire and across the country. Every company that we are aware of is using credit scores in some fashion to determine rates. Talk to your agent about how credit may be affecting your rates. If you have poor credit, this is yet another reason to start taking steps now to clean it up. Over the next several years, a poor credit score could end up costing you several thousand dollars. nhbr

Chris J. Woods is vice president of the New England Business Association.

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