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What You Should Know About Credit-Based Insurance Scores

Find out why insurers base rates on your credit score - and the U.S. states where that's not allowed. 

By
Laura Adams, MBA
October 16, 2013
Episode #331

Page 2 of 2

How to Increase Your Credit-Based Insurance Score

So what is an insurance score based on? It’s similar to the factors used to calculate a regular credit score, like payment history, credit utilization, amount of debt, length of credit history, credit inquiries, and legal actions (such as filing for bankruptcy).

In other words, you can increase your insurance score when you pay loans and credit card bills on time, don’t max out credit cards, and never apply for more credit than you really need.

But insurance scores hone in on patterns of financial management. For instance, applying for one credit card over a 12-month period isn’t like to have a negative effect, but getting several within a short period of time typically hurts your insurance score.

Additionally, other types of red flags may include having multiple mortgages or auto loans with high average balances. These may be a predictor that you have a home claim or an expensive auto insurance loss in your future.

When you apply for a new credit account or even an insurance policy, a “hard inquiry” is made on your credit report that can temporarily ding your credit score. However, under the credit models used by most insurance companies, the only inquiries that hurt your insurance score are those for new credit accounts, not new insurance applications.

Therefore, due to the differences in insurance scores and credit scores, it’s possible to have good credit, but a poor insurance score. That means you’ll pay more for insurance, or in extreme cases, be denied for a home or auto policy.

What If I’m Denied Insurance Based on My Credit?

If an insurance company denies you coverage due to information in your credit history, you generally have the right to get a free copy of your credit report.

In some cases you may have errors in your credit file that are dragging down both your insurance and credit scores. Always report errors and get them corrected as quickly as possible.

For a video tutorial that shows you step-by-step how to check your credit report and correct errors, download my free Credit Score Survival Kit.  

Which States Prohibit the Use of Credit-Based Insurance Scores?

Insurance laws vary depending on where you live because insurance is regulated by states, not the federal government. In recent years, a few states have passed laws that prohibit insurers from using credit to set rates.

For instance, if you live in California, Massachusetts, or Hawaii, insurers can't use your credit history as a factor when setting rates for auto insurance. And if you live in Maryland, home insurers are prohibited from considering your credit.

However, no state allows credit to be the sole factor in setting insurance rates. There are many other variables that come into play, including your driving record, annual mileage, and vehicle model. Home insurers must consider numerous property features, such as age, construction type, and location.

To sum up, by paying your bills on time and using credit wisely, you can build a good credit history that helps you qualify for lower auto and home premiums, in most states.

More Articles and Resources You Might Like:

5 Ways to Get a Loan with Bad Credit

9 Things That Can't Hurt Your Credit Scores

Credit Score Survival Kit - a free video tutorial to with smart stategies to build credit! 

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Insurance files image courtesy of Shutterstock.

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