Did you know that insurance companies typically consider your credit history, whether positive or negative, when you apply for auto or homeowners insurance? Insurers may use your credit information when deciding whether to approve your insurance application and when determining the premium you’ll pay.

Why does your credit history matter when you apply for insurance?

Studies by independent researchers and insurance industry actuaries have convinced insurance companies that a strong correlation exists between your credit history and the likelihood that you’ll file an insurance claim. Using information contained in your credit record, an insurer calculates your insurance score. If your insurance score is low, the insurer may consider you to be less of a risk than if your insurance score is high.

How is your insurance score determined?

Although methods vary, an insurance company typically calculates your insurance score by applying a mathematical formula to statistically significant factors on your credit record. These factors may include the amount of debt you have outstanding, whether you have serious blemishes on your credit report (such as past-due amounts, collection actions, and bankruptcies), and the number of times you’ve applied for credit within the past year.

What if you have little or no credit history?

In many states, having little or no credit history automatically places you into the “average” risk category. Other states prohibit insurers from even using credit as an underwriting factor if you have little or no credit history.

Can your insurer cancel or refuse to renew your insurance based on your credit?

In many states, an insurer can cancel or refuse to renew your insurance policy if your credit has deteriorated. However, some states have passed legislation prohibiting insurers from using your credit report as the sole basis for making decisions about cancellations and renewals.

The following information is reprinted with permission from Forefield, Inc. Copyright 2006-2010.