Will a Poor Credit Rating Raise Insurance Premiums?

Credit ratings are the primary indicators of a consumer’s financial well being at particular point in time. Insurance organizations routinely use consumer credit ratings to ascertain property insurance and car insurance premiums—the lower your credit rating, the higher your monthly premium payments will be. The reasoning associated with making use of credit ratings to ascertain insurance premiums is controversial, producing legislative action to prohibit the practice in certain states.


What is a Credit Rating?
Credit ratings are three-digit statistical indicators of credit worthiness. Also called credit scores and FICO scores, credit ratings are based on information collected about individual consumers by the three primary credit reporting organizations. Credit ratings range between 300 and 900. Prospective creditors make use of the ratings to evaluate the associated risk of loaning money to consumers, but insurance organizations and prospective employers also make use of the data to ascertain insurance policy premiums and employment eligibility.


What's Makes Up a Credit Rating?
Consumer credit ratings are based on five predominant factors, but every consumer credit reporting agency weighs the data somewhat differently in their computation strategies. The five main factors in order of significance are repayment history, outstanding debt, credit history, varieties of credit and new credit.

Credit Crunch
As outlined by CBS news, 90 percent of insurance organizations make use of consumer credit ratings and credit history to evaluate insurance risk. Consumers who have never filed an insurance claim can still be subject to increased insurance premiums based on their credit scores. Consumers with good credit ratings, above 750, will pay the least amount of money for insurance coverage. Consumers with average ratings, between 620 and 750, will be charged higher insurance premiums than consumers with good credit ratings. Consumers with bad credit scores, less than 620, pay the highest insurance premiums, even if they have always paid their premiums on time and never filed a claim.


What are They Thinking?
CBS news also reports on the justification offered by insurance organizations for making use of credit ratings to evaluate risk. A National Association of Independent Insurers associate explained that consumers who are financially responsible will likely maintain their properties more responsibly and also drive more responsibly.


Consumers Fighting Back

Hawaii, California and Massachusetts prohibit the utilization of credit ratings to establish car insurance premiums. Maryland bans making use of credit scores to determine homeowner’s premiums. During 2009, 16 additional states considered legislation to prohibit making use of credit ratings as a factor with regard to homeowner and car insurance premiums. The issues associated with insurance-scoring are continuing, with insurance organizations battling bans anytime legislation is suggested. Consumer-driven advocates of legislation against this practice are definitely not backing down.