Your Credit Rating: How Does it Affect Your Insurance Premium?
Article revised on 17 July 2017
You’re looking for home insurance or auto insurance. You’re in the process of asking for a quote when the insurance company asks if you would give them access to your credit file. Why?
That’s because access to information in your file is invaluable which, along with other criteria, would allow them to determine your premium in a fair and reasonable manner. Here’s how.
Your credit file: How does the insurer use it?
One of the key principles of insurance resides in finding the right balance, meaning the premium paid must reflect the risk to be insured. To determine the risk, and the premium amount to be paid, your insurer will look at different criteria, including your credit information.
But what does this information say about the the risk you pose? A study conducted for the Texas Department of Insurance showed there is a correlation between the quality of the credit file and the probability of incurring a loss. The logic is simple: credit information is usually a reliable source for determining a person’s ability to maintain their property, one of the key factors for preventing losses. Therefore, people who pay their bills on time and follow sound credit practices are generally less likely to incur losses than people who are late making payments and whose credit scores are less than ideal.
What’s a credit rating?
A credit rating, also called a credit score, ranges from 300 to 900 and is a good indicator of how good your credit is. The greater your score, the better your credit history, meaning you pay your bills and mortgage on time.
An advantage for most
For most people, this practice, which is carried out by most insurers, provides a distinct advantage. In fact, according to a report by the Autorité des marchés financiers on auto insurance rates, the information in the credit file can lead to a 30% reduction for those with excellent credit ratings. For people with poor credit ratings, the maximum extra premium could be 15%.
A word of caution however: All the information in your credit file is collected by Equifax and TransUnion. And as we all know, everyone makes mistakes. That’s why you should check your credit file once in a while to make sure your information is accurate.
If you experience an event that may negatively impact your file, like fraud, identity theft or a catastrophe recognized by federal authorities, you should notify your insurer, who can opt not take into account your credit rating during the evaluation process.
Is it mandatory?
Your insurer needs your consent before consulting your credit file. You can always choose to deny the insurer’srequest. They will still accept to insure you and will not cancel your contract. But if you do deny them access to your file, you may be losing out on a reduction in premium rates.
Are you worried your credit score could be affected when your insurer consults your file? Don’t be. The insurer has no influence on your score, and can’t change it in any way. In fact, since the information is not used to review a credit application, and a verification by an insurer is not an indication of the consumer’s behaviour, credit agencies do not take these verifications into account in a person’s credit score.
Lastly remember that your credit score is just one of many criteria insurers base themselves on to determine your premium payments. Your age, gender, type of vehicle and home to be insured as well as your claims file are just some of the factors considered in the equation.
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