What does credit have to do with insurance? Why are insurance credit scores used to rate & qualify you for car insurance & homeowners insurance? If you have a clean driving record, why should you pay higher auto insurance rates if you have bad credit? What if you have only an average credit score? Is using your credit report just an excuse to charge you higher rates? Are you being ripped off? I will explain in this blog post why insurance companies use credit scoring, and give you the knowledge you need to get the best insurance rates for you.

How can insurance companies order your credit report? Isn’t that illegal?

A few states do not allow insurance companies to use your credit information to qualify you or rate your insurance policy. Some states limit the use of credit, but most states allow insurance companies to use your credit information to determine the price of your insurance.

For example, in Oregon, when you apply for home or auto insurance, the insurance company uses your credit to rate your policy. But if your credit gets worse, the insurance company can’t increase your insurance rates because of it when your insurance policy renews.

In fact, in Oregon, customers can request their credit be reviewed once each year, and if their insurance rates go down because of better credit, they will get a better price. But if their credit is worse, their insurance rates cannot go up. A lot of people in Oregon are saving money each year by requesting to have their credit reviewed.

In other states, you may have the option to have your credit reviewed each year, but you may have to pay higher rates, depending on the results.

So, the first insurance shopping tip regarding use of your credit, is know how your state allows insurance companies to use your credit. Start by asking your insurance agent or company for information, and then check out your state department of insurance website (click the link to go to my website to find the one for your state) for how your state regulates insurance companies’ use of credit.

When you contact an insurance company for an insurance price quote, they usually get your permission to order your credit, in addition to other reports (such as your claims history). Or, if you get an insurance quote online, you agree to the use of your credit in the terms of service.

However, the insurance company you have now does not need your permission to order your credit report, since as your insurance company, they are considered to have a “need to know” certain information about you.

For example, your homeowners insurance company may non-renew (cancel at your renewal date) your policy if they found out you have had a bankruptcy or foreclosure. The insurance company can order your credit information, but the insurance company still needs to comply with your state’s insurance laws, so if your state does not allow the cancellation of your home insurance due to bad credit only, your insurance company cannot cancel your insurance.

Some insurance companies are more quick to cancel your insurance coverage than others, so always check to see if your insurance company has a good complaint record.

Why do insurance companies use your credit, and what does your credit have to do with your insurance?

Insurance companies love using credit because it is very accurate in predicting future claims. The explanation is, people who are careful with their credit, are also careful in other aspects of their lives, and less likely to have claims. People who are reckless with their credit tend to be reckless in other aspects of their lives, such as driving habits, and have more claims. The statistics agree with this assumption.

However, what is true for an overall group of people (people with bad credit) is not necessarily true for the individual. A careful, responsible person who maintains and protects their house & car from damage, and drives defensively, can have their credit ruined by the unexpected costs of a major illness.

Insurance companies often have an appeal process from extraordinary events damaging your credit, such as identity theft, bankruptcies due to medical bills, and sometimes divorce if bad credit resulted from a vindictive spouse.

These appeals are rare, and although many people feel they are blameless for their bad credit, it is hard to qualify for a credit appeal which will be worth your time to lower your rates. Make a few calls, and speak to several people at your insurance company about it to see if an appeal is an option for you.

You may know your credit does not make you a higher risk of claims for the insurance company, but insurance companies have to treat all people with the same risk characteristics equally, and they cannot make an exception for you.

What you need to know about how insurance companies use credit when shopping for insurance

Here is your second insurance shopping tip: allow the insurance company or agent to order your credit report.

Some insurance shoppers do not want their credit report ordered, fearing it will make their credit score go down. I understand this concern, particularly if you are buying a house and need to qualify for a mortgage, since high credit scores are so important these days.

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Don’t be afraid to allow an insurance agent or company order your credit. The agent or insurance company representative never sees your credit report. The insurance company’s computer program reads your credit information for certain characteristics, such as late payments, to develop an insurance score.

The insurance credit score is a numerical scale using your credit information and other information to rate your insurance quote.

For example, one insurance company may have an insurance score scaled from 1 to 15. 1 is the best. 15 is the worst. People with really good credit may score anywhere from 1 to 5, with people scoring “1” getting the lowest rates, based on the specifics of their credit information. All these people may pay their bills on time, but other factors, such as length of credit history, or available credit, may have some people with good credit scoring better than other people with good credit.

I worked for a certain insurance company over 2 years, and checked the rates for my auto insurance each time it renewed. I saw my Insurance Score go from a “6” to a “1” over time for no apparent reason. A far as I know, my credit had not changed.

If you ask for a price for auto insurance or home insurance based on estimated “good” credit, you will get a meaningless price, because the insurance company is not likely to guess your correct insurance score.

Some insurance companies may low ball you with the most optimistic price, and then when you want the policy it is hundreds of dollars higher.

Other insurance companies, not wanting to mislead you, may be too pessimistic, and quote you a price hundreds of dollars higher than the actual price, leading you to keep shopping and miss the insurance company with the best price for you.

Here is another shopping tip: Give the insurance company all the information it needs to get you the most accurate and best credit score. Most agents are content to get your social security numbers and dates of birth for you and your spouse. But also make sure you give the insurance company all addresses you have lived at for the last 5 years, or at least your current address, and the address you have lived at the longest in the last 5 years. I have seen this make the difference from a very good insurance score to a great insurance score.

If you co-own the car with someone to whom you are not married, have the person with the best credit be the primary owner (first named insured) of the policy. Unless you are married, insurance companies will usually use the credit of only the first person listed on the policy.

Good credit can help you get low insurance rates!

Say you have a speeding ticket or two on your driving record. If you have bad credit, too, you may not qualify for some insurance companies, and have to pay high risk auto insurance rates.

However, if you have a ticket or two, and good or great credit, you may still qualify for low auto insurance rates with insurance companies having more sophisticated rating plans. Good credit is such a strong predictor of a low risk of future claims, some insurance companies will charge you only a little more for one or two moving violations.

Whether you have good or bad credit, insurance companies will treat your credit differently, so it really pays to shop all the major insurance companies to find the best rates for you. You will find some insurance companies will want to charge you double the rate of other insurance companies for the same coverage.

 What if you have a clean driving record but bad credit?

 You will still be rewarded for your good driving record, even though you have bad credit. If you can find an insurance company with low rates for good drivers and does not use credit, get a quote from them. But I don’t think there are any more.

There are auto insurance companies not using credit, offering insurance for high risk drivers, (DUIs, multiple at-fault accidents, etc.), but unless you have a really bad driving record, you will pay less with a standard or preferred auto insurance company using credit.

Here is my final insurance shopping tip: Whether you have good credit or bad credit, shop with ALL the leading insurance companies to save hundreds of dollars on insurance, and find the best price for you.

What do you think about insurance companies using credit? Tell me about it. Please leave a comment on my facebook page. Follow me on Twitter for important insurance consumer news and new blog entries at CarInsWatch.