A lot of factors go into determining the rates a consumer pays for insurance. Claims history, the cost of the car or home, location, and many other variables are all part of the equation. One piece of information that is often used in the process of developing an insurance premium quote is a person’s credit score.

What is a credit score?

A credit score is a number derived from assessing an individual’s history of accessing and using credit. Credit scores range from 300 to 850, with anything above 720 considered a “good” credit score. A credit score is used to determine creditworthiness. There are five components that go into the calculation of a credit score: payment history (are your bills paid on time), the length of time you’ve had an account, how much of your available credit is used (credit utilization), the types of credit lines open, and recent or new lines of credit that have been opened.

At its most basic, a credit score is a number that indicates to a lender how likely you are to be able to repay a loan or credit line on time.

How does my credit score affect insurance?

It makes sense for a lender to check a credit score when a person is buying a new car or a home. These are expensive purchases, and the entity loaning the money — usually a bank — uses a credit score to determine the level of risk involved in loaning the person the money to make the purchase. The lower a credit score is, the greater the risk is for the lender, which means the interest rate charged on the loan will be higher.

Insurers have similar concerns, and they may use your credit score to determine what rates you might be quoted for home or automobile insurance.

Does this apply to everyone?

The use of credit scores to determine an “insurance score” for the purposes of pricing home and auto insurance is widespread. There are three states that prohibit the use of a credit score to determine auto insurance rates: California, Hawaii, and Massachusetts. Likewise, there are three states that prohibit the use of credit scores as part of determining a home insurance premium. Those states are California, Hawaii, and Maryland.

For everyone else, an “excellent” credit rating — generally a number above 760 — typically means that in conjunction with a variety of other factors that are considered, you’re more likely to receive the best rates for homeowners and automobile insurance. Those with “fair” or “poor” credit scores may be quoted higher premiums.

What you can do?

You can check your credit score for free once a year by going to AnnualCreditReport.com. Each of the major credit rating agencies — Experian, Equifax, and TransUnion — allow you to check your report once a year, which means you can receive up to three free reports per year. Knowing what your credit score is, is a good place to start. Find out what factors might be lowering your number and address them if possible. Paying bills on time and reducing the total amount of credit used (paying down debt) are two solid ways to improve a score. It can take time to improve a credit score, but in the long run doing so will most likely save you money on interest rates on loans and on premiums for auto and homeowners insurance.

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