How Credit Scores Affect Insurance Rates

What do your credit score and insurance rates have to do with one another? It turns out, they're pretty directly related. At least, that's what the statistics show. Before the 21st century, insurance companies based your insurance rates by combining various known facts - such as the value of your car and your driving record - and statistics - such as the chance of your car being stolen where you live, or whether or not you're a good student. Together, facts and statistically-driven data created a portrait of you from which insurance agencies determined your overall insurance risk, and adjusted your rates to compensate for that. Credit scores didn't factor into the equation.

How Your Credit Score Began to Matter to Insurance Companies

Flash forward to the 21st century. A gentleman working for MetLife analyzed information from 170,000 auto insurance clients. Guess what he did? He pulled their credit reports and compared them to the customers' insurance claims. Guess what he found out? People with lower credit scores have more accidents. In fact, he was able to discern very specific financial risk from the number of bills people had in collections.

For example, a person with zero items in collections cost MetLife an average of 74.1 cents for every dollar they spent on their policy. Cha ching! Score for MetLife. When people had one item in collections, they cost MetLife closer to 97.5 cents per dollar paid. Hm. People who had three or more items in collections were starting to cost MetLife money. MetLife spent an average of $1.19 for every dollar the customer paid towards their policy. Yikes - no profit there!

As a business trying to earn a profit, guess what MetLife did? They started adjusting insurance rates according to people's credit reports. Lo and behold, as of 2001 almost all auto insurance carriers, as well as many homeowner's insurance companies, use credit reports as a part of determining rates.

How Does This Effect You and What Can You Do?

You have the right to know if you are denied insurance, or your rate has been hiked, due to your credit score according to Lexington Law. If it has, the insurance company must provide you with:

• Which credit bureau provided the information
• The reason(s) for the decision
• Instructions on how to obtain a credit report

Once they've supplied this information you can obtain your free report.

To help keep your rates low, you can:

Get a CLUE: A CLUE report, that is. Insurance companies share their claim information in a single database, Comprehensive Loss Underwriters Exchange (CLUE). You're entitled to free annual report. Check it out to see the information they have in regards to your previous claims.

Improve your score: Keep working towards repairing your credit. The better score you have, the better insurance rates you'll receive - not to mention the other benefits of having a strong credit score.

Keep a Low Insurance Profile: The stigma of Water Damage can mean homeowner's insurance rate hikes. Keep an eye on potential risks. This is not to say you shouldn't report things. Always follow your insurance policy's guidelines. But if water damage occurs, and you can afford to fix the repairs via licensed contractor, you may save more money than by claiming water damage and risking increased insurance rates.

Make Smart Changes: Have an older car? You might want to check the Kelley Blue Book Value to make sure you still need comprehensive insurance. Your monthly premiums might be more than the car is worth which means you can save money by changing to a liability policy instead.

As long as you keep working towards financial health, you will begin to enjoy the benefit of lower insurance rates.