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Insurance and your Credit Score

 blog

 2 minute read

Published: Mon Jun 26 2023

By Sean Hundtofte, Ph.D., Former NYU Adjunct Assistant Professor, Financial Economist at the Federal Reserve Bank of New York, Chief Economist and Head of Acquisitions at Better.com, Former Portfolio Optimizer at Bridgewater Associates - Expert in Financial Economics and Mortgage Lending Solutions

How are credit scores and insurance related? When I was a household finance researcher and professor, we would use models where credit functions like insurance. Think about taking out a loan against your car acting as insurance against the value of your car going down (if it does go down, you walk away and the lender gets the car). But those are just models!

In the real world, credit scores are one of the primary factors that insurance companies use to determine the risk of insuring a person. What’s a credit score? Your credit score is a numerical representation of a person's creditworthiness, and it is based on your credit history. A higher score indicates a more reliable borrower in the lending industry. And in the insurance industry, insurance companies use credit scores to predict the likelihood of filing a claim or the amount of money they’ll have to pay out if there is a claim.

Is that even legal? If you’ve got a bad credit score from an unfortunate event like losing a job, isn’t this like kicking you when you’re down? Yes, and yes. While insurance and credit scores may not seem to overlap at first glance, The Fair Credit Reporting Act (FCRA) allows insurance companies to use credit scores as a factor in determining insurance rates. However, some states have laws that limit the use of credit scores in insurance underwriting or require insurance companies to disclose their use of credit scores to you, the policyholder.

The use of credit scores for insurance has been controversial, with some arguing that it unfairly penalizes people who may have had financial difficulties in the past. However, insurance companies argue that credit scores are a reliable indicator of risk and that they help to ensure that premiums are fair and accurate. A person with a high credit score is considered a lower risk, and therefore, they will pay lower premiums. Conversely, a person with a low credit score is considered a higher risk, and they will pay higher premiums.

What does this all mean for you? Insurance and credit scores go together. Your credit score not only impacts what you pay on your debts, but also on your insurance! The good news is boosting your credit score not only lowers costs on your debt (which Solve Finance helps with) but also insurance (which companies like Marble Pay and Coverage Cat can help with). The bottom line: It is important for you to maintain a good credit score to ensure you’re getting the best rates possible on your insurance policies.

Today, the finance world is saturated with resources, but it's challenging to differentiate between clickbait-articles and legitimate guides aiming to help you effectively manage your finances. However, companies like Solve, Coverage Cat and Marble Pay take care of the hard work for you. We offer the latest financial advisor technology to help get the most out of your financial resources. Whether you need to boost your credit score for lower insurance premiums or optimize your debt for other financial goals, Solve offers resources and tools to save you time and money.

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