Credit Score Impact on Insurance Rates

Credit Score Impact on Insurance RatesAs consumers, we all know that credit scores affect loan and credit card qualifications. A lesser known fact is the credit score impact on insurance rates. This might be puzzling to some, so below are some details on why credit scores matter and how they are used when it comes to your Massachusetts auto insurance and homeowner’s insurance.

Why Credit Scores Matter

Massachusetts homeowner’s insurance companies use credit scores for the same reason that lenders do,… to assess risk. Statistically, those with lower credit scores are more likely to file claims than those with higher scores. Therefore, lower credit score customers are likely to cost an insurance company more money. It naturally follows then that those individuals should contribute more to the insurance pool.

Auto insurance companies are not allowed to use credit scores. However, they do have access to information such as delinquent payments to past insurance companies. They also know if previous insurance policies were cancelled due to lack of payment. These can definitely increase the risk of insuring you and therefore increase your premiums.

Does it seem unfair?

Your natural reaction may be that it seems awfully unfair. Those with lower credit scores are likely in lower income ranges or have experienced financial difficulty in their lives. They are often less able to afford higher rates when it comes to insurance, credit cards, and loans, yet they are required to pay more. It comes down to a financial and business analysis. The system rewards those who act more responsibly in maintaining a good credit score. Those with lower scores are not necessarily irresponsible but may have merely undergone hardship, but they are statistically lumped into the same group as others.┬áThe system is not fair from the consumer perspective, but it is fair from the provider’s perspective.

Insurance is mechanism for pooling resources/funds from many sources to cover the losses of those with claims. Those who are more likely to submit claims and use those funds are asked to contribute more into the pool. When you think of it that way, it makes much more sense.

More on Credit Score Impact on Insurance Rates

When insurance companies review your credit score, they do not do so in the same manner as lenders and credit card companies would. It’s not a “hard” pull that shows up in your report and potentially reduces your score. It’s more of a “soft” referential pull. Working on improving your score can save you money in many ways, not just with insurance rates. It’s a worthwhile thing to do. In fact, we recommend that you check your credit scores yearly to identify ways to improve it and to address any potential errors in your credit report.