Vision Credit Education, Inc.

If you didn’t think your credit could affect the premiums you pay to insurance companies, think again. We all know that premiums are calculated based on statistics, regardless of anyone’s personal record. For car insurance, a 60-year-old woman driving a sedan will automatically pay less than the 20-year-old male in a Mustang, even if they both have spotless driving records.

For medical insurance, a smoker will pay a higher premium than a non-smoker. These methods for determining insurance premiums are generally well-known. But the use of a person’s credit history to set a rate might not be.

In practice, a person’s credit history has been considered by insurance companies for over a decade. Even if a person has a clean driving record, a less-than-perfect credit history could stick him/her with higher insurance rates. The reason for this relates back to statistics, again. Apparently, customers with poorer credit are more likely to file insurance claims. This makes them more expensive clients than customers with better credit, and their insurance premiums reflect this. Also, insurance companies are not required to inform customers that they are not getting the best rates possible. Previously, the federal Fair Credit Reporting Act was believed to require insurance companies to notify customers if their credit history prevented them from getting the best rate. However, a high court decided that the Fair Credit Reporting Act doesn’t actually require insurance companies to do this. So, customers are not entitled to know that their credit is getting them higher rates.

There are a couple reasons insurance companies use credit histories to determine rates. While a driver may be able to get certain things removed from their driving record like a parking ticket or even a DUI, their credit report is less easily altered. This is why many insurance companies see it as a more solid predictor of risk. The theory is that individuals with solid credit are more responsible and will probably continue to be so. On the bright side, an individual with an excellent credit report may be able to make up for a less-than-perfect driving record and secure a lower rate.

There have been several complaints about the use of credit history by insurance companies. One complaint is that credit reports are often inaccurate. According to a study conducted by the U.S. Public Interest Research Group in June 2004, 79% of the credit reports surveyed had some kind of error or mistake. Another complaint is that individuals with bad credit may have simply fallen on hard times and aren’t actually “risky” people. However, these concerns do not change the fact that insurance companies do consider credit history when setting rates.

There are a couple of ways consumers can deal with this reality. First, it’s important to know your credit score. This way, you’ll know if it could possibly hurt your ability to secure the lowest rate. Second, ask how insurance companies set rates. They probably won’t give you the exact formula, but they’ll probably tell you if they use credit history or not. Finally, make sure to regularly check your credit score. The three largest credit reporting agencies – TransUnion, Equifax, and Experian – are obligated to send you one free credit report a year. Be careful when reviewing it to make sure there are no errors that could increase your insurance premiums. Any errors should be reported to the agency that issued you the report because they are also obligated to investigate any errors.