There are a lot of things insurance companies take into consideration when deciding how much to charge you for insurance. For example, an auto insurance company will take a look at your driver history in relation to accidents and violations. A less-than-perfect record will result in higher premiums. But did you know that your credit score can affect your out-of-pocket costs for insurance as well? It can.
The out-of-pocket costs you pay for insurance involve two things: premiums and deductibles. The premium is the amount of money you pay to purchase a policy while the deductible is the amount you contribute to settle a claim. Both are affected by your credit score.
What Is Allowed
Nearly every state allows insurance companies to consider your credit score as one of the factors used to determine your annual premium. How heavily they can weight your credit score depends on the state and the type of insurance you're talking about. Having said that, no state allows an insurance company to base annual premiums solely on credit score alone. It can only be used as one contributing factor.
The standard rule of thumb says that a lower credit score suggests a customer presents a higher risk for default. Insurance companies will compensate for that risk by charging higher premiums. A higher credit score presents a lower risk. More affordable premiums are the result.
What Is Not Allowed
Most states do not allow insurance companies to disqualify applicants from obtaining insurance based on credit score. That means you should be able to obtain insurance even if your credit is as bad as it could possibly be. You might pay higher rates, but you can't be turned away because of your credit score.
Where health insurance is concerned, the Affordable Care Act prohibits insurance companies from even considering credit score if they are selling through an exchange. Prices are dictated by income, geographic location and a few other eligibility requirements.
Credit Score and Deductibles
Now that you know how your credit score can affect your premiums, what about deductibles? Credit score and deductibles are indirectly linked by way of your premiums. For example, suppose a low credit score results in an annual premium slightly above what your budget allows. You may be able to bring the premium down by accepting a higher deductible. You could then make the case that your low credit score costs more out of pocket in the event of an insurance claim.
Your credit score does affect your out-of-pocket costs for insurance. It's best to maintain a good credit score if you want access to the least expensive insurance.
