What does yourdo with your ability to drive? Or the likelihood that something devastating will happen to your home? The most obvious answer is nothing, but that’s not what insurance companies think.
If you have a low credit score, chances are you’re paying a higher insurance premium than someone who has a high credit score (all other things—like driving history—considered equal). Insurance companies don’t necessarily say that credit score has anything to do with your driving habits. Rather, they argue that people with low credit scores are more likely to file a claim. In turn, they charge a higher annual premium for the extra risk.
Higher credit scores = fewer insurance claims?
Theof credit-based insurance pricing suggests that people with higher credit scores have more money and are more likely to pay out of pocket for smaller, less expensive vehicle damages. Consumers with lower credit score consumers, on the other hand, don’t have the money on hand to pay for vehicle damages of any size and rely on insurance to cover the cost of damages. Following that logic, yes, people with low credit scores would be more likely to file an insurance claim.
A vicious cycle
Unfortunately, higher insurance rates make it harder for consumers who are already struggling in a bad economy. Consider someone who’s been laid off because their employer could no longer afford to pay them. If that person falls behind on their bills because of their job loss, their insurance rate will go up. That person is already having a hard time, through no fault of their own, and the insurance company kicks them while they’re down.
Credit scores are suffering
Unemployment isn’t the only thing leading to lower credit scores. Credit card companies also play a part. In the past few months, card issuers have been lowering credit limits, sometimes at or just above the cardholder’s current balance, causing credit scores to drop.
Part of the credit scoring system compares a person’s credit card balance to their credit score. This ratio, called credit utilization, is 30% of a person’s credit score. If your credit card issuer lowers your credit limit on a credit card with a balance, your credit utilization will go up, and your credit score will go down. As a result, your insurance company will likely increase your insurance premium, again, because of circumstances outside your control.
Credit-based insurance scoring makes a bad situation worse. If you’re having a hard time making your credit card payments and your credit score drops, you’ll only have a harder time getting caught up on your bills once your insurance rate goes up.
Right now, it’s perfectly legal in most states for insurance companies to base insurance rates on credit scores. To help change the law in your state, send a complaint to your state’s insurance department.