How Credit History Can Impact Your Insurance: What To Expect When You Apply For Insurance On Your Own

John Ulzheimer

John Ulzheimer | Blog

Sep 19, 2013 | Updated Apr 27, 2016

Now that you’ve decided to purchase your first home or car you’ll have to get it insured. Your mortgage lender will require insuring your home while the state you live in will require that you insure your car.

What happens when you try to buy insurance for the very first time? Applying for auto or homeowner’s insurance on your own can be a relatively quick process, but it pays to shop around, and know how risky a customer you’re considered in the eyes of the insurer, in order to gain  a sense for how much you’ll pay for insurance. Here’s what to expect when you apply for insurance on your own– and how your credit impacts the process.

Your Personal Life Plays A Role In Your Premium

When you apply for auto or home owner’s insurance, you’re asked a series of questions including your age, occupation, marital status, level of education, driving history, commute time, and geographic location. Why all the interest in your personal life?

Just as you buy insurance to hedge your risk from the future unknown, insurers price their premiums for coverage as reasonably and accurately as possible, in the same manner. The more customers who don’t file claims, the more money an insurer stands to make.

Though every insurer has their own unique system for calculating risk, asking questions like those above is one way to essentially place you into a variety of “customer buckets,” for lack of a better term. Using the predicted average risk of those groups, pricing levels are determined.

Your Past Financial History Predicts Future Behavior

In addition to the personal questions above, your credit report, including bill payment history, the number and type of accounts you have, collection actions, outstanding debt, and the age of your accounts, can help creditors predict your likelihood of filing an insurance claim, and the potential amount of it.

Under the Fair Credit Reporting Act, credit reports are allowed for use in insurance underwriting, and you give the insurer permission to access the information when you apply. Usually called insurance scores or credit based insurance scores (CBIS), the scores are not the same as those that lenders access to determine whether you’re approved to borrow.

Your Credit May Determine The Premium You Pay

Though you won’t necessarily be denied insurance coverage for lacking a solid credit history or carrying a high debt to income ratio like you could when applying for a loan, the information in your credit report can play a role in the premium you’re quoted for auto and home insurance coverage.

Just as you can and should monitor your free annual credit reports for accuracy, you should claim your free Comprehensive Loss Underwriting Exchange (C.L.U.E) reports (for auto and home insurance), which contains any insurance claims you’ve filed in the last seven years.

If you haven’t had a claim, you won’t have a report. If you really want to get a sense for the information the insurance underwriter might see, you can also purchase your credit insurance score, though like a credit score with a loan product, it likely won’t be identical to the one the insurer uses.

Learn what’s in your credit score here »
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