Does your credit score affect your insurance rates?

A lower credit score could result in a higher insurance rate. (iStock)

Credit scores impact the interest rates that consumers receive for various types of loans, including credit cards, mortgages, student loans and even auto insurance rates. A higher credit score means an individual will receive a lower interest rate, saving them thousands of dollars over several years.

If you're looking to save some extra money on insurance — whether it's home insurance or car insurance — Credible has you covered. Credible's online marketplace allows you to view your insurance options easily and determine which companies offer the best rates and deals.

But it's always a good idea to know your personal finance inside and out, particularly your credit score, before applying or switching insurance policies. Here's what you need to know:

Why does a credit score affect insurance?

Lenders use credit scores to determine the ability of a consumer to pay back a loan on time, such as mortgage refinances, student loan refinances and personal loans.

“Credit scores are a way for lenders to determine risk before approving a loan, such as a credit card, mortgage or refinance,” said Leslie Tayne, a Melville, N.Y. attorney specializing in debt relief. “The higher the credit score, the lower the risk to lenders that consumers will default on their loans.”

FICO scores are one of the most well-known, range from 300 to 850 and are based on credit reports.

Underwriting criteria for loan approval and rates vary from lender to lender, but poor credit is typically a score lower than 580, she said. A score of 580-669 is considered fair, 670-739 is good and a score of 740 or higher is typically considered excellent.

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How much does credit score affect insurance rates?

Insurance companies use a slightly different method to determine the risk level of a consumer for auto, renters and homeowners insurance policies.

1. How insurance companies reference credit scores

Insurance companies use credit scores as a factor when determining premiums. States that prohibit this practice for auto insurance include Massachusetts, Hawaii and California, Tayne said. Insurance companies use credit scores to get an idea of the risk involved for the company.

“Insurance companies want to reduce the chances of a policyholder missing payments,” she said.

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2. How insurance companies use credit-based insurance scores

Most insurance companies use credit-based insurance scores to evaluate how likely a policyholder is to have a claim, Laura Adams, a Vero Beach, Fla.-based consumer advocate, said. Like lenders, insurers use credit as a factor when setting rates in states that allow it.

Insurance companies obtain credit scores both when you purchase a new policy and when your policy comes up for renewal, said Jackie Boies, a senior director of housing and bankruptcy services for Money Management International, a Sugar Land, Texas-based nonprofit debt counseling organization.

Head to Credible to get a better understanding of the different types of home insurance coverage and what the coverage amount is. Click on Credible's home insurance partners to get a free home insurance quote.

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3. How credit-based insurance scores are different than the traditional ones

Credit-based insurance scores help insurers get a general idea of the likelihood that a claim will be filed.

“This type of score can help minimize the risk that the individual will cost the company more in filed claims than the person is paying in premiums,” Tayne said. “Insurance companies want to maximize profit and take on as little risk as possible.”

If you have insurance and want to lower costs or if you're looking to switch car insurance companies, then head to Credible to explore pricing and compare quotes in one spot.

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4. How these types of scores affect insurance premiums

Lower scores can result in higher premiums. Consumers should keep in mind that other factors are taken into consideration, such as previously filed claims, location and age of the vehicle and home, Tayne said.

Credit can significantly affect premiums, but it could mean that a driver with poor credit pays double or triple for auto insurance than a similar driver with excellent credit, Adams said.

A person’s credit-based insurance score is another reason a consumer should maintain good credit and check a credit report annually for errors, Boies said. One credit reporting error could cause a jump in your premium when your policy renews. Get your free credit report at www.annualcreditreport.org and dispute any errors.

Consumers can improve their credit scores by paying their bills on time, not taking out too much credit and not using over 30% of the utilization ratio of their credit cards. A higher credit score gives you lower rates for all your insurance policies.

“Good or excellent scores indicate that you've previously been responsible with credit by making payments on time and not borrowing too much,” Adams said. “In general, those with higher scores qualify for the most competitive interest rates and repayment terms.”

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Credit score ranges

Credit score ranges vary depending on the company and each one uses an algorithm to evaluate a borrower based on your credit reports' information at the nationwide credit bureaus: Equifax, Experian and TransUnion, Adams said.

Here are ranges for some other popular credit scores, Adams said.

  • FICO Mortgage Score: 300 to 850
  • FICO Auto Score: 250 to 900
  • FICO Bankcard Score: 250 to 900
  • VantageScore: 501 to 990
  • TransUnion: 300 to 850

Check your credit score on a regular basis and participate in credit monitoring by visiting Credible today.