Why Do Insurance Companies Check Your Credit Score

By | March 11, 2022

In some states it is illegal for providers to check credit scores. They are only interested in your payment history which they can also obtain via your insurance score.

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A higher score may make it easier to get a homeowners insurance policy at a low rate.

Why do insurance companies check your credit score. When you lease or buy a car lease an apartment or acquire a new credit card your rating is often checked. However credit-based insurance scores are generally built to help insurance companies understand the likelihood that someone will file insurance claims that cost the company more than it collects in premiums. Why do insurance companies use credit information.

Some insurance companies believe there is a direct statistical relationship between financial stability and losses. When issuing or renewing an insurance policy insurers that use credit information also consider multiple additional factors when calculating a fair premium for assuming particular risks. You can find the results plus our complete methodology below.

Those with higher credit scores tend to get into fewer accidents and cost insurance companies less than their lower-scoring counterparts. Studies have indicated that those with lower credit scores are likely to file more claims or have more expensive insurance claims while those with higher credit scores are less likely to do so. Why is the insurer interested in your financial discipline.

An insurance company can only use your credit-based insurance score as one factor in its underwriting process. Insurers do not use your actual FICO score as a rating factor in determining your premiums. Actuaries have found a strong correlation between credit history and insurance claims meaning that people with bad credit tend to file more claims compared to those with good credit.

Because more than one company can issue a credit-based insurance score your rating may differ from company to company. They believe that as a group consumers who show more financial responsibility have fewer and less costly. Life insurance companies want to determine the overall risk of insuring you ie how likely you are to die while your policy is active and also look at LexisNexis risk scores medical reports and your motor vehicle report to make that determination and set your premiums.

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If the insurance company does use an insurance score your debt payment history current account balances recent credit applications and whether youve declared bankruptcy can all impact your score. We also examined how transparent the major car insurance companies are regarding their use of credit data and where they get it. Statistical analysis shows that those with a low insurance score are more likely to file a claim.

One of the problems with allowing insurers to check drivers credit scores to assess risk however is the fact that there is no consistency or standard among credit rating firms when gauging an individuals creditworthiness. To insurance companies a credit score demonstrates a persons level of responsibility and behavioral patterns especially in managing finances. According to a review by the National Association of Insurance Commissioners over 90 of car insurance companies use your credit history as a tool in deciding what you qualify for.

Your credit score is one of the key factors most car insurance companies use to determine your rates. Theyre responsible for entering the information received from your creditors including your credit use and management bankruptcy payment history type of credit used etc in your credit report. Why insurance companies use credit-based insurance scores Research shows that credit-based insurance scores can accurately predict accident potential.

A poor credit score may also suggest there is a potential you will miss making a monthly insurance bill payment. People with no credit pay 67 more for car insurance than people with excellent credit on average. Insurance companies check your credit score in order to gauge the risk theyll take to insure you.

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Similar to general credit scores credit-based insurance scores are largely based on your credit report from one of the major credit bureausExperian TransUnion or Equifax. Insurers dont have access to your entire credit report just the credit score. Insurance companies have departments of actuaries that look at that claims history and forecast the future of claims.

Studies show that a credit score is directly related to how frequent and severe insurance claims are filed. While credit history and scores are most commonly used to obtain additional lines of credit and sometimes employment they are also used by the majority of auto insurance companies to help determine the rate that you pay for car insurance However in some states it is illegal to use credit to determine an insurance premium. Insurers use good credit scores to reward customers with competitive premiums.

One of the things that actuaries have noticed is that clients with a higher credit score rating make fewer claims. Do All Insurers Use Credit Information. Your credit report and insurance score are just two of the many factors that influence your life insurance premiums.

It will be considered with several other factors that vary by insurance type. Depending on where you live insurance companies will check credit. Insurance companies run credit checks on applicants because risk assessors and actuarial studies have shown that a persons credit or financial history is a good predictor of how many insurance claims a person will file.

Regardless of the company the higher your score the better.

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