Having Bad Credit Can Increase the Cost of Insurance
Written by: Kristy Welsh
Last Updated: September 25, 2017
Having bad credit not only makes applying for a credit card difficult, it may also increase your insurance premiums. Having a low credit score shows lenders and insurance companies that you have a habit of defaulting on payments or you have bad spending habits, which puts them at risk. Because of this risk you may be penalized by having to pay higher than normal interest rates or you may be denied financing altogether. This is no different when obtaining insurance quotes. Automobile insurance, homeowners insurance, and life Insurance quotes are all affected by bad credit and low credit scores.
A bad credit score won't just increase the cost of your car loan, it will probably jack up your car insurance premiums as well. More than 90 percent of insurance companies consider credit history as one of the factors when setting car insurance rates. Almost all states let insurers do this except for California, Hawaii and Massachusetts, which ban the practice. Insurers say there is a connection between credit history and the filing of claims. People who pay their bills on time, file fewer and less costly claims than those with a lot of late payments or delinquencies. Insurance companies don't consider the same credit score that lenders do, they look at a score designed specifically for them — the Insurance Score.
Nationwide, the average difference in rates between good credit and fair was 17 percent. The difference between good credit and poor credit was 67 percent. The use of credit for setting auto insurance premiums is controversial. Some consumer advocates say it unfairly penalizes people with low incomes or those who have job losses and these are the people who need cheap auto insurance the most.
You are probably already paying more for homeowners insurance if your home is near the ocean or in a fire-prone forest. But something else may be driving your insurance premiums even higher — your credit score. We know lower credit scores impact mortgage rates but what most homebuyers don't know is that a low credit score may also increase the cost of homeowners insurance.
As millions of Americans are still rebuilding their credit, younger potential home buyers are just building their credit for the first time. The widely use FICO credit score is used by about 85 percent of home insurers; three states, however — California, Massachusetts and Maryland prohibit insurers from using credit scores in their insurance calculations.
According to a recent article, a spokeswoman for State Farm Insurance was quoted as saying, "There is an undeniable correlation between credit information and insurance risk. It is a correlation in terms of the frequency a person could have a claim and the severity of their claim." She went on to say that State Farm does not look at the entire credit score, but just aspects of it to determine someone's rate. She could not provide information as to what scores correlate to specific increases or decreases in insurance rates.
Will a life insurance company charge higher premiums if you have bad credit? The answer we have found is: it depends.
After doing some research, credit is less of an issue when it comes to life insurance than it is with other types of insurance coverage. And it certainly doesn’t come close to the impact that it has when you are applying for either a job or a loan.
Exactly how bad credit will affect you getting a life insurance policy, depends on the life insurance company that you are applying to. For most, bad credit will not be an important factor. Some companies will assess a slightly higher premium, for reasons similar to why an auto insurance company might.
The biggest thing these companies look at is what kind of work that you do because certain occupations are considered to be more hazardous than others. If in the course of investigating your employment they learn that you are either unemployed, or have a history of spotty employment, they may pull and review your credit report as a way of getting a clearer view of your overall financial picture. While your credit quality itself is unlikely to be reason for decline, or even for an increase in premium, it will be a corroborating factor in determining your overall insurability.
The bottom line is if you have bad credit, getting insurance is going to cost you more. When buying a car, not only will you pay a higher interest rate but your insurance premium will be higher as well. Same holds true for buying a house. Our best advice to you is to clean up your credit first, before you buy a car, house or life insurance. That way you know you will be getting the best deal possible and not paying more for your insurance premiums.
Ready for help?
- Free personalized credit consultation
- Free access to your TransUnion report summary
- Free credit report audit on all your accounts
- Free score evaluation and recommended solution