Most people know that their credit score can influence whether they’re approved for a mortgage, auto loan or credit card. What surprises many consumers is that their credit history may also affect how much they pay for insurance.
In many states, insurance companies use what is known as a credit-based insurance score when calculating premiums for auto and homeowners insurance. This score isn’t the same as the credit score lenders use to approve loans, but it is built using many of the same credit report characteristics. While credit is only one factor insurers consider, having a stronger credit profile may improve your chances of qualifying for more competitive insurance rates.
Why Does Credit Matter to Insurance Companies?
Insurance companies evaluate many different risk factors when determining premiums. For auto insurance, they may consider your driving history, annual mileage, vehicle type and previous claims. For homeowners insurance, they often evaluate the age of the home, construction materials, location, prior losses and replacement cost.
In states where it’s permitted, insurers may also consider credit-based insurance information because years of actuarial research have shown a statistical relationship between certain credit characteristics and future insurance losses. That doesn’t mean your credit determines your premium by itself. Instead, it becomes one piece of a much larger underwriting picture.
What Information From Your Credit Report Is Considered?
Insurance companies generally look at overall credit management rather than focusing on one number. Every carrier has its own proprietary model, but many consider factors such as payment history, credit utilization, outstanding balances, the age of your accounts, recent credit activity and the overall mix of credit accounts on your report.
Consumers who consistently pay bills on time, keep credit card balances relatively low and maintain older accounts often have stronger overall credit profiles. Multiple late payments, collections, charge-offs, bankruptcies or high revolving balances may negatively affect a credit-based insurance score. Even then, these items are only part of the overall rating process.
Can Improving Your Credit Lower Your Insurance Premium?
Often, yes. If your insurer uses credit-based insurance information, improving your credit profile may help you receive more favorable rates when your policy renews or when you compare quotes with other insurance companies.
Building better credit usually doesn’t happen overnight. The most effective long-term strategies include making every payment on time, keeping revolving balances low, avoiding unnecessary debt, maintaining older accounts whenever possible and reviewing your credit reports regularly for errors. These habits can strengthen your overall credit profile while also improving your financial health.
Can Becoming an Authorized User Help?
Some consumers choose to become an authorized user (AU) on a seasoned credit card account with a long history of on-time payments and low credit utilization. When the account is reported by the card issuer, the tradeline may appear on the authorized user’s credit report and strengthen certain aspects of their overall credit profile.
The amount of benefit varies from person to person. Existing credit history, current debt, payment history and the reporting practices of the card issuer all play a role. No tradeline provider can guarantee a specific credit score increase or promise lower insurance premiums. However, strengthening your overall credit profile may improve your chances of qualifying for better insurance pricing with companies that consider credit-based insurance information.
The Bottom Line
Your credit profile can affect much more than borrowing money. It may also influence what you pay for auto and homeowners insurance, depending on where you live and which insurance company you choose. Understanding how credit-based insurance scores work gives you another opportunity to improve your financial future.
If you’re working to build stronger credit, Coast Tradelines can help. Since 2010, we’ve helped consumers nationwide improve their credit profiles through seasoned authorized user tradelines from established cardholders. While responsible credit management should always come first and individual results vary, becoming an authorized user may complement your credit-building strategy. Browse our available tradelines or sign up today to learn how the process works and determine whether an authorized user tradeline is right for your financial goals.
