Credit scores don’t just determine your credit limits and credit card interest rates. They’re also being used to decide what kind of insurance you can get.
Insurers use credit scores, which are calculated based on credit use, the credit available to you and your payment habits, to determine how risky it could be to insure you, according to the Federal Trade Commission.
That means if your score is too low, you could end up paying more than you might otherwise for homeowner’s insurance or car insurance.
A higher credit score means you are likely less of a risk, and in turn, means you will be more likely to get credit or insurance or pay less for it, the FTC says.
The state of California has already proposed a bill banning insurers from using credit scores to determine rates or deny insurance all together, a practice called insurance scoring, but it was rebuffed by lawmakers, and Alabama is working to prohibit insurers from holding a person’s lack of credit history against them, the Electronic Privacy Information Center, a public interest research group, notes.
"The problems with insurance scoring are so great that the practice should be prohibited," according to the Center for Economic Justice, because it's "inherently unfair [and] has a disproportionate impact on consumers in poor and minority communities," the group says.
Based on your score, which can range from 300 to 850, insurers will try to determine how likely you are to file a claim and how much you might try to claim, according to the FTC.
Despite the lack of a causal link between a credit score and insurance risk, insurance companies nevertheless can raise an individual's rates or even deny coverage based on this number, according to EPIC.
So if you have a flawless driving record but an outstanding loan, your auto insurance premium could be higher than someone without an outstanding loan, EPIC says.