You probably know that your credit plays a big role in your financial life. It affects whether you get approved for credit accounts — like car loans, credit cards and mortgages — and the interest rate you pay.
However, even if you don’t want a new credit card or need to finance a big purchase, your credit history can surprise you by reaching its tentacles deep into your finances in ways that have nothing to do with debt. One of them is how much you will have to pay for auto and homeowners insurance.
[See: 10 Costs Homeowners Insurance Doesn’t Always Cover.]
Why your credit is important to insurance companies. It may seem odd that insurers would consider your credit history when quoting rates for an auto or home insurance policy. But studies show that consumers with good credit are less likely to have an insurance claim, and therefore are less risky insurance customers.
That’s why approximately 95 percent of auto insurers and 85 percent of home insurers use a credit-based insurance score to evaluate you, according to the National Association of Insurance Commissioners. Like it or not, your credit history is a powerful tool insurers use to determine risk, maintain profitability and keep their investors happy. However, the use of credit is banned for setting auto or home insurance rates in California, Hawaii, Maryland and Massachusetts.
[See: 12 Habits to Help You Take Control of Your Credit.]
What is a credit-based insurance score? Credit-based insurance scores are different than regular credit scores, such as FICO or VantageScore, which are typically used by mortgage lenders and credit card issuers. Each is trying to forecast a different outcome:
— An insurance score helps predict your likelihood of filing a future claim.
— A regular credit score helps predict how likely you are to repay a debt.
How much credit affects your auto insurance rates. Insurance is regulated by states, so the rules for setting premiums vary depending on where you live. Consumers with poor credit pay an average of 104 percent more for auto insurance than those with excellent credit, according to a 2016 insuranceQuotes study. Even having fair credit costs you 28 percent more on average than if you have excellent credit.
The study showed Alabama drivers experience the biggest rate — 56 percent on average — for having fair instead of excellent credit. Excluding the prohibited states, North Carolina drivers see the lowest rate increase at 16 percent.
If you think those rate spikes are high, having poor instead of excellent credit is a real budget-buster. Drivers in Arizona can be hit with a whopping 226 percent rate increase. Even North Carolina drivers, who have the lowest increase by state, can still expect to pay 51 percent more.
How much credit affects your home insurance rates. If you’re a homeowner with subpar credit, it causes your home insurance rates to surge as well. The impact of poor credit on home insurance translates into a 100 percent average increase, and fair credit results in a 32 percent hike when compared to having excellent credit, according to an insuranceQuotes study.
Just like with auto insurance, the increases vary depending on where you live. If you have fair credit and insure a home in Montana, you’ll see the highest increase at 66 percent. Although credit history is an allowable insurance rating in Florida, homeowners there don’t see a rate hike.
The homeowner premium increase when you have poor credit is highest in West Virginia at 202 percent and lowest again in Florida at zero percent. The second lowest increase is 37 percent for New York residents.
[See: 12 Simple Ways to Raise Your Credit Score.]
How often insurers check your credit. Different carriers check your credit-based insurance score at different times. Typically, you can expect them to pull your credit when you apply for a new policy — not every renewal period. In other words, changes to your credit probably won’t affect your premiums after you’re a customer. That can be helpful if your credit gets worse, but also means that you could be overpaying if your credit has improved over time.
So, shop your auto and home insurance policies every year to find out if you qualify for a better rate. There’s no downside: Shopping doesn’t hurt your credit in any way. And if you don’t find a lower price, you can stay with your current provider.
When you understand that credit affects much more than your ability to get a credit card, you realize that maintaining good credit is a top financial priority — otherwise it’ll cost you.
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The Surprising Relationship Between Your Credit and Insurance Rates originally appeared on usnews.com
