Get free, no obligation quotes from multiple providers

State Farm Insurance Allstate Insurance Farmers Insurance American Family Insurance Unitrin Insurance Travelers Insurance

Why Do Insurance Companies Check Credit Scores?

Across the insurance industry, providers include consumer credit reports as a component of the package of data they use to calculate premiums. It might not seem like credit scores and risks of claims have much correlation to one another, especially to renters. Most of us think of the risks we insure ourselves against with renters insurance all exist external to us. We think of the risk of fire or theft, and it's tough to see any connection with our credit. Industry use of consumer credit information in the calculation of premiums for insurance policies is perplexing to a lot of people.

But there is logic to the use of credit based insurance scoring. Insurance is essentially the assumption of risk in exchange for an agreed upon sum of money for a set period of time. Renters insurance guards us as policy holders from a specific set of risks: the risk of losing our belongings in a fire, the risk of a civil liability judgment, the risk of being burglarized in our apartment. But in agreeing to shelter us from the risks associated with the life of renters, insurance companies take on risks themselves, some of which may not be so apparent to us.

Credit and Risk are Correlated

You can very plausibly ask yourself what in the heavens your credit score has to do with your risk of being victimized by theft. And in a sense, you are right to ask these sorts of questions. The industry has no useful tools to analyze the risk of individual policy holders because of the limits they face in monitoring us individually. Both laws and monetary restraints prevent them from this type of monitoring. The only things they know about us individually are what they can find out on the public record. One of these items is our credit report.

But using that report, insurers can make a prediction of the claim behavior of a client based on past historical data. In other words, if they can detect a correlation between credit scores and claim report frequency or severity, they can use your credit score as a basis for setting rates because it can be viewed as an indicator of specific risk. The use of credit based insurance scoring has been the topic of strenuous debate from both sides of the issue: those who feel it is unfair and irrelevant, and those who see it as the industry's best chance to accurately predict risk.

But in the Meantime...

Credit based insurance scoring will continue to be used across the industry until some legal measure successfully works to prevent its use. For the time being, consumers have to be aware that their credit will be taken into account. Take good care of your credit and you will have nothing to worry about. With a strong credit history, you can save money on renters insurance. Just realize that credit scoring is here to stay for the time being.

Learning Center