September 21, 2018
Your credit score affects many aspects of your financial life. It affects your ability to qualify for loans and credit cards, and the interest rates that you’ll pay if you do qualify. It may affect your credit card limits, rental fees or deposits, utility services, and cell phone/cable bills.
Can your credit score also affect how much you pay for insurance? According to a new study by WalletHub, it can. The WalletHub study focused on the connection between car insurance rates and credit scores, and how they change by state.
The insurance industry calculates credit-based insurance scores built on information in your credit report that is relevant to your likelihood of filing an insurance claim. Credit-based insurance scores have proven to be a decent predictor of fewer accidents, and therefore fewer claims.
Insurance companies are banned by state law from using credit-based insurance scores in three states (California, Massachusetts, and Hawaii), but in the remaining states, your credit score will factor into your premiums.
Credit scores play the biggest role in New Jersey car insurance rates, where the average fluctuation based on credit is 102%, while the minimum fluctuation is 60% and the maximum is 139%. In other words, an average NJ driver with no credit would pay 102% more for insurance than a NJ driver with excellent credit would. For the insurance companies in this state, the smallest difference in insurance premiums between drivers with excellent credit and those with poor credit is 60% and the greatest difference is 139%.
The rest of the top ten states where credit scores affect your rates are Virginia (with an average fluctuation of 97%), Michigan (92%), Texas (91%), Wisconsin (91%), Arizona (91%), Pennsylvania (89%), Tennessee (88%), Colorado (87%), and Missouri (87%). Minnesota has the highest variation, where the effect can range anywhere from 0% to 186%.
Aside from the states where credit-based insurance scoring is banned, the states with the lowest premium variations between drivers with no credit and those with excellent credit are Alaska (0%-64%), Iowa (0% to 80%), Kansas (0%-76%), Montana (0%-54%), Nevada (0%-69%), New Mexico (0%-79%), and South Carolina (27%-87%).
Your choice of insurer matters as well. According to the WalletHub report, Farmers Insurance gave the most weight to credit scores, with potential savings of 54% with excellent credit compared to no credit. Geico was the least concerned about credit scores, offering only a 20% discount for excellent credit. Progressive, Allstate, and State Farm all came in with 43%-44% savings.
Does a low credit score affect other forms of insurance? Homeowner’s insurance may incorporate your credit score into other property-specific risk factors. Obviously, areas prone to natural disasters pay higher premiums – but everything, from the location of the nearest fire hydrant to the presence of an alarm system, is considered. Even the claims history of your neighborhood is fair game.
Credit scores can indirectly affect life insurance in some cases. Ted Bernstein, the founder of Life Insurance Concepts, notes that insurance companies don’t usually ask for a credit score on applications, but they do ask for permission to explore credit histories. Life insurance companies may raise premiums a few percent based on extensive risk factors, according to Bernstein.
Credit-based insurance scores will incorporate the risk factors relevant to that form of insurance. For example, your home alarm system will be factored into your home insurance rates but probably not into your auto or life insurance rates.
Since insurance is state-regulated, your rates for any form of insurance may be affected by where you live – and in all but three states, your credit score and information from your credit report can factor into your premiums.
Credit-based insurance scoring gives you another reason to keep your credit score high – but did you really need another one? Take regular steps to maintain your score, like paying all your bills on time and keeping your balances low. Check your credit report frequently for errors or signs of fraud. Treat your credit score with the care it deserves, and you’ll reap the financial rewards.
You can check your credit score and read your credit report for free within minutes by joining MoneyTips.