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Why Insurance Companies Check Your Credit Score

By Debt.ca on February 7, 2022 No Comments
different insurance companies and credit scores

If you’re buying a house, car, or taking out a loan, you’d naturally expect a credit score check to be a part of the process. Many people are shocked when insurance companies ask to perform a credit check when putting together insurance quotes, whether for car or home insurance.

There is a reason that insurance companies do this. It comes down to assessing how much risk you pose as determined by your financial responsibility. It’s become more commonplace in most provinces to run the credit of a consumer. Therefore, we’ll go deeper into the thinking later in this article. It’s also important that you know your rights as a consumer and what to expect if auto insurance companies consent to run your credit report.

Before we go deep into the why and what, let’s start with some basics.

What factors determine your credit score?

Your credit score is determined by the following factors:

  1. Payment history: this includes mortgages, loans, credit cards, and sometimes basic bills such as utilities.
  2. Credit utilization: also referred to as your credit-to-debt ratio, this considers how much of your available credit you use.
  3. Credit age: this looks at how mature your credit usage is.
  4. Inquiries: how many times you’ve attempted to get credit.
  5. Credit mix: how many types of credit you have responsibly used.

Credit scores range from 300 to 900, and the higher your score, the more favourable you look in the eyes of potential lenders and insurers.

How do insurance companies get your credit score?

Insurance companies’ credit checks typically involve a “soft pull”. This means they’ve been authorized to look at your credit report. It’s like when you look at your credit score. They might check with all three major credit bureaus or just one or two of them.

Why do insurers care about your credit score?

Why would insurance companies check credit in the first place? As we mentioned above, your financial activity can correlate with behaviours that insurers find important, such as safe driving. Studies show that people with lower credit scores are more likely to file claims. Whereas people with higher credit scores are likely to file less. Therefore, insurance companies check your credit score to determine whether higher insurance premiums would be appropriate to cover their risk.

The province you live in will affect whether or not your credit score has any bearing on your insurance quote. Newfoundland and Labrador have banned insurance companies from running credit scores altogether. Most other places in Canada, including Nova Scotia, can run your credit score when determining eligibility.

What is the Voluntary Code of Conduct?

Consumers might wonder if a credit score has any relevant bearing on insurance coverage. Though insurance companies contend no, there is most certainly relevance regarding coverage. This is why the Insurance Bureau of Canada instilled the Voluntary Code of Conduct in 2010 to support consumer protection.

This supports the insurance companies in obtaining your credit information but takes extraordinary circumstances (such as illness) into account when putting together a quote. This is also the code that forbids insurance companies from denying or cancelling coverage because of a low credit score or no credit history.

The bottom line is you can still be insured with a bad credit score. However, it will likely cost extra. Your insurance payments will not affect your credit score since insurance companies do not report to the credit bureaus.

Can you refuse a credit score check?

Insurance companies are not allowed to deny or cancel your coverage solely based on your refusal to consent to a credit check. They must receive your full consent and approval to run your credit before ever doing so and it is fully within your rights to refuse a credit score check.

Do insurance inquiries hurt your credit score?

As mentioned before, an insurance company using credit checks to make decisions will do something called a soft credit pull instead of a hard credit pull. Hard credit pulls are used when the consumer is searching for loans, a credit card, or any debt and alerts other debtors that the consumer might be searching in multiple places.

A soft credit check is done by the consumer themselves, occasionally by potential employers and in the case of this discussion, insurance companies. A soft pull does not indicate that a consumer is seeking additional debt. This inquiry will not negatively affect your credit score.

Conclusion

There are plenty of reasons to keep your credit score in good shape for future credit inquiries, and possibly earning lower insurance premiums is no exception. However, if you’ve found yourself with poor individual credit and still need to be insured, there is no reason to lose hope. Be sure to check your credit score often so you know how you’re progressing. You might pay a higher car insurance premium upfront, but you can change things down the road.

If you’d like help with debt relief so you can improve your credit report, please contact us today. We are here to help.

Debt.ca

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