Knowing that your insurance carrier is using your credit history to determine your premiums likely makes you squirm—and that’s understandable. It’s sometimes hard to tell whether insurance scoring is hurting or helping you, especially when you have fair credit.
Here’s how insurance scoring will affect your premiums for homeowners insurance and auto insurance if you have average credit.
Credit history has been shown to correlate with insurance risk, which is why most U.S. insurers consider it, along with other metrics, to calculate premiums. Insurers take into account some factors in your credit history, though not specifically your credit score, to calculate what’s called an insurance score.
Although some states, including California, Massachusetts and Hawaii, have restricted the controversial practice of insurance scoring, research shows that credit-based scoring generally helps consumers pay less in premiums or doesn’t affect costs at all. In a 2012 study, the Arkansas Insurance Department found that the premiums for 87% of over 2 million auto policy premiums and 82% of more than 650,000 homeowners policies either decreased or were unchanged with insurance scoring.
Whether or not you pay more really depends on two things: Your insurance score and the number of insurance claims you’ve made. If you’ve made an average amount of insurance claims and have average credit, your premiums likely won’t change much. You might even end up paying less than you would if your credit weren’t factored in.
Who sees the biggest differences? The outliers
The people whose credit tells a very different story than their insurance claims history will see the biggest changes in premium when adopting an insurance scoring model. If you have average credit but a horrendous motor vehicle record, for instance, you might end up paying less for your car insurance premiums because of your credit history. If your motor vehicle record is flawless, on the other hand, you might end up shelling out more for premiums than if your credit were better.
If you want to get a better sense of why you’re being charged what you’re being charged, look at your past insurance claims and get a free credit report. Look for problem areas and find out what you need to work on to get your costs down.
The next step: Giving your fair credit a makeover
Accidents happen; there’s nothing you can do about that. But your credit is another story. If your fair credit is the result of a few missed payments on a fair-credit credit card, set up automated bill pay to make sure you’re never late again. Focus on paying off your outstanding credit card debt. Once you improve your fair credit, your premiums will go down and you can start saving the difference.
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