Understanding the Importance of Your Credit Score History

As an insurance consumer, you need to understand that your credit history can affect how much you pay for car insurance. Not only can it affect your insurance rates, but your credit score can even impact whether you can get insurance at all, or if your policy is able to be renewed. Insurance companies have been known to use credit reports to develop rating systems that classify consumers based on multiple factors. As a consumer, how you’re classified – whether you fall into a preferred, average, or high-risk class – can impact what rate an insurance company charges you.

How Did the Use of Credit Scores Start?

The use of credit scores in insurance rating became a common practice about 25 years ago with homeowners’ insurance. It grew out of insurance companies’ attempts to establish rating plans that would assess consumer risk levels as accurately as possible, in order to predict their own expenses as well as charge appropriate rates.

Banks and other financial institutions had long used credit information in determining risk on business such as home loans, and the correlation between those financial records and insurance risks became clear.

Laws and Regulations of Insurance

The laws and regulations that govern insurance are set at the state level, therefore, where you live can determine what information companies can gather and how they can use it, as well as what your rights are. In California for example, insurance companies are not allowed to use your credit information.

Facing financial penalties based on your credit score history

Generally, in states where credit may be used for underwriting and payment options, insurance companies use your basic credit information into formulas that also consider your accident history, years you have been driving, where you live, your age, gender and assorted other relevant facts about you.

If you’re interested in finding out if credit was used to determine your rates, contact your insurance carrier. Many states require insurance companies to tell consumers what top factors have been used in determining rates, but your insurer may not even understand the exact significance of some of the numbers, since they often come from outside sources.