In a nutshell, yes. Insurance companies use a variety of factors to develop a risk profile for you when they are underwriting your insurance policy and determining your rate. One of these factors may be your personal credit history and not because they are weighing the likelihood that you will pay for your policy.
Insurance rates are based in part on how much risk the insurance company believes they will be taking on by underwriting your policy. In order to determine that risk level, they rely on real world statistics and actuarial tables built from those statistics. By looking at large amounts of data, the insurance industry can make certain assumptions about you based on specific characteristics like your gender, age, marital status, etc. This is how insurance companies determine that teenage boys are more likely to be in accidents than teenage girls and that married people are less likely to file an insurance claim than single people.
When it comes to your credit, the statistics can tell the insurance company some important things about how much of a risk you are. The industry has demonstrated that there is a very strong relationship between credit history and risk level meaning that just looking at a person’s credit history can be used as an objective measurement of their insurance risk. The bottom line is that people who pay their bills on time and are good stewards of their finances are more careful and conscientious with their cars and homes, which makes them a lower risk from an insurance perspective.
This means that the insurance company is using your credit history in a very different way than your bank might. When your bank looks at your credit, they are assessing your income, assets, debts, and financial history to determine how likely it is that you actually meet the financial obligation of a loan or line of credit. They are looking at your individual details to make a decision about your ability to pay. The insurance company is looking at your credit as an objective way to assess how risky you are from an insurance standpoint. They are looking at your individual details as compared to other people. The bank cares about where you work, how long you have been there, how much you make, and how much you owe. The insurance company only cares about how your credit history informs your risk profile based on the actuarial data.
Using information like your credit history to determine your insurance rates is one way that insurance companies guarantee that they are offering their products at fair prices. The use of statistics and actuarial information in determining risk helps remove any subjective decision making from the process. Insurance companies can offer better prices to a broader range of consumers by using factors like their credit history.
The score used by the insurance company however, is different than your standard credit score used by banks and other financial institutions. In order to determine your insurance score, the credit bureaus use a formula that looks at things like the number of accounts you have, how good you have been at paying your bills, how stable your finances are, any negative factors like liens and bankruptcies, and how much you currently owe. Unlike your regular credit score, occasional late payments have less of an impact on your insurance score than patterns of financial irresponsibility.
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