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How credit history affects your insurance premiums

Your credit history not only influences how much interest you pay on mortgages and car loans; it also can affect the amount you pay for auto and home insurance. But an improvement in your credit score doesn’t automatically mean you’ll be getting a break on your insurance rates.

Lenders use credit scores to determine how likely you are to default on loan. Insurers use a different type of rating system — credit-based insurance scores — to determine how likely you are to file insurance claims. Studies have shown that credit history is a good indicator of a person’s likelihood of filing claims, according to the Property Casualty Insurers Association of America, a trade group. One theory for this relationship is that people who manage their credit carefully likely will be careful about other areas of their lives.

A number of companies develop formulas for determining credit-based insurance scores. While each formula is unique, they all typically include certain factors such as payment history and debt. FICO, one company that develops a credit-based insurance score, uses the following formula:

  • Payment history accounts for 40 percent of the score.
  • Outstanding debt, 30 percent.
  • Length of credit history, 15 percent.
  • New lines of credit, 10 percent.
  • The mix of credit you have (such as installment loans, credit card accounts and mortgages), 5 percent.

Personal details excluded

While it’s important to understand what factors are measured by credit-based insurance scores, it’s equally important to know what factors they don’t measure. Credit-based insurance score formulas do not consider personal information such as race, religion, gender, age or marital status. Formulas also exclude such data as income, employment history and location. Finally, certain credit inquiries as well as participation in credit counseling programs don’t affect credit-based insurance scores.


Certain financial habits will affect your credit score and your credit-based insurance score. For example, making a string of late payments or running up debt on a credit card is likely to harm. But “insurance scoring models are more focused on what happened in the last 12 months,” says Lamont Boyd, director of insurance scores at FICO. “As you get further away from that 12-month period, the information in the credit report becomes less significant.”

Also, some credit-based insurance scoring formulas weigh factors differently than credit scoring formulas do.

Because of those differences, a big drop in your credit score doesn’t mean your credit-based insurance score will drop to the same degree. Likewise, a boost to your credit score may not immediately change your insurance rates.

A question of fairness

While most insurers use credit-based insurance scores, not everybody thinks credit-based insurance scoring is fair. A credit score doesn’t always indicate how well a person manages his or her finances, says Birny Birnbaum, executive director of the nonprofit Center for Economic Justice. Many people have encountered financial distress because of such things losing a job, becoming ill or getting divorced. With so many people losing their homes in the recent mortgage mess, the credit-based insurance model also penalizes consumers for the poor business decisions made by lenders, Birnbaum says.

Some states prohibit the use of credit-based insurance scores. According to the Property Casualty Insurers Association of America, California and Massachusetts have outlawed the use of credit information to determine any sort of insurance rate. Hawaii bans the use of credit information for determining auto insurance rates, while Maryland bans the use for setting homeowner’s insurance rates.

However, FICO’s Boyd points out that most consumers manage their credit wisely and benefit from discounts because of their credit-based insurance scores. Some insurers also give customers a chance to explain extraordinary financial circumstances, according to the property and casualty insurers group.

Insurers also point out that credit-based insurance scores are only one factor out of many that determine rates. Other things that affect auto insurance premium costs include driving record, vehicle type and claims record. Home insurers consider such factors as security features, proximity to fire departments and claims history. Insurers vary on how much weight they place on these scores.

While you can’t do anything to change your claim history, you can improve your credit-based insurance score if you take certain steps, FICO’s Boyd says:

  • Pay all bills on time.
  • Don’t open new credit card accounts unless they’re needed.
  • Keep credit card balances as low as possible.
  • Correct errors in your credit report, as inaccurate information can lower your credit-based insurance score. While insurers typically don’t disclose credit-based insurance scores to consumers, you can get a free credit report each year at
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