Why Insurers use Credit Scores to Calculate your Premium

Insurance companies have become more and more dependent upon outside information in order to develop premiums. With so many different factors that determine a premium already, adding credit scores into the mix isn’t really much of a surprise.

The main reasoning that insurers have started to use credit scores in determining premiums is to lower their risk. Insurers want to make sure that they are paid and on time. When they aren’t paid on time it makes their books look less attractive to shareholders. So in order to appease the shareholders, insurance companies are finding new ways to make it worth having customers that don’t normally pay their bills on time. The justification for this is by charging more money for those that have a history, determined by their credit score, of late payments. While policies are still cancelled if they are more than 30 days late in most cases, this additional amount added to their premium if paid for several months or years substantially pads the accounts of the insurance companies and makes up for any potential loss that they make take as a result of this non payment.

So essentially by charging more on your premium through the use of credit scores, insurance companies have been able to reduce their own risk, appease the shareholders and make their stock more lucrative, and they have created a potential source of additional income, which also appeases their shareholders. The reality is that it’s a great win for the insurance company and because they no longer have to absorb rising costs for profit, they don’t need to raise the rates for those with excellent credit.