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Do Insurance Companies Use Credit Data?

It likely comes as no shock to you that lenders and credit card companies would want to check the credit scores of their credit applicants. But many consumers are surprised to learn that a variety of other companies or individuals may use your credit information too, such as utility providers, phone companies and landlords.

Insurance companies are another prominent example of businesses outside the lending industry that use models that leverage credit bureau data. Why would an insurer care about your credit history? And how does your credit-based insurance score potentially affect your ability to get a new policy or renewal at a reasonable rate? Here's what you need to know.

How Do Insurance Companies Use Credit Scores?

Many insurance companies use what's called a credit-based insurance score, which is different than a traditional credit score. They use this credit-based insurance score to evaluate a consumer's risk of insurance loss. The higher the score, the lower the perceived risk.

While it may not seem intuitive that credit habits could serve as a predictor of someone's likelihood of insurance loss, studies consistently show a strong correlation. And after the FTC reviewed the use of credit-based insurance scores for auto insurance in 2007, it also found that "they are predictive of the number of claims consumers file and the total cost of those claims."

Why is this the case? One simple answer may be that people who handle credit responsibly are more likely to maintain their homes and cars responsibly as well. Whatever the reason for their predictive nature, 95% of all personal insurers now use credit-based insurance scores when evaluating an applicant's risk (in the states that allow such use).

NOTE: The use of credit histories in underwriting or rating decisions is limited or banned in California, Hawaii, Maryland and Massachusetts.

What Information Is Included in a Credit-Based Insurance Score?

Like your credit risk score, your credit-based insurance score is based on credit report data. Examples of the types of credit categories that could influence your insurance score include:

Note, most insurance providers also use internally developed methodologies that consider other non-credit bureau related data.

As credit-based insurance scores are based on credit bureau data, errors in your credit bureau report could impact your credit-based insurance scores. As such, it's a good practice to frequently check your credit reports for accuracy and dispute erroneous information.

How Do Credit-Based Insurance Scores Affect Insurance Premiums?

First, it's important to point out that not all types of insurance rely upon credit-based insurance scores. Sa El, the co-founder of Simply Insurance, points out that they're typically used by home and auto insurers. But he said, "If you're looking into life insurance or health insurance, your credit score usually isn't a factor."

If you do happen to be shopping for home or auto insurance, the use of credit-based insurance scores typically works in your favor. If you pay your bills on time, have reasonable credit debt levels and are not actively seeking new credit, the chances are that you'll have a higher credit-based insurance score. A recent report by the Arkansas insurance department found that over 50% of premiums decreased because of credit information.

In roughly another 25% of cases, credit-based insurance scores had no impact either way. However, if you have severely poor or damaged credit, it could hurt your chances of qualifying for insurance at lower rates. Just under 20% of policyholders in the Arkansas study did see their premiums increase due to information found in their credit reports.

Can You Get Affordable Insurance Rates Without Great Credit?

Don't panic if you're looking to apply for insurance without an exceptional credit-based insurance score. Credit-based insurance scores are only one of the many factors that insurance companies use when determining rates.

For example, if you're applying for auto insurance, your driving history, car age and mileage, and zip code could all be additional factors considered. So with a low-risk car type and stellar driving record, you may still qualify for great insurance rates despite a below-average credit-based insurance score.

Clint Proctor

Clint Proctor is a freelance writer and founder of WalletWiseGuy.com, where he writes about how students and millennials can win with money. His work has been featured in several major publications including Business Insider, U.S News and World Report, Yahoo Finance, and Forbes.