How your credit score affects your insurance policy

One of the smartest investments you can make is insuring your home, vehicle(s) and belongings against loss, theft or damage. What you may not realize is how insurers decide how much each of us will pay for that coverage. Oftentimes, our credit reports--those gathered by firms such as Experian and Transunion--are used to determine how much of a risk we present and how much to charge us as a result. credit-report

The problem lies in that many consumers are unaware of this practice and there is no way to determine how that internally generated credit score is used. According to a 2010 survey by the Insurance Brokers Association of  Ontario, 78 per cent of consumers didn't know about this procedure.

Although it's illegal to use your score without your explicit permission, the fine print of most insurance applications will tell you that the insurer will examine all the elements of your standard credit score: your payment history, type of credit used, outstanding debt, length of credit history and other factors.

The cost difference between a poor score and a good one can be enormous, says Steve Masnyk, spokesman for the Insurance Brokers Association of Canada. Policies that cost $500 for someone with an excellent credit score can cost someone with a poor score $4,000.

Where general consumer credit reports are available to consumers, insurance credit scores are not. A report by the Canadian Council of Insurance Regulators, a voluntary body focused on policy issues, criticized a "lack of clarity" and "lack of transparency" in the use of these scores by the insurance industry.

Much like your standard credit score, the credit scores used by an insurer includes your payment history, type of credit used, outstanding debt, length of credit history and other factors. However, once that internal, private score has been created, you -- the consumer -- have no way to know what weight it carries, nor even if it's being used to write your policy. The formula is confidential. "The main reason is because it's a competitive issue," says Masnyk. "It's like the recipe for Coke, it's proprietary. So it'll be tough for any customer quoted a price to ask what weight this score will have for them."

A 2009 survey by the CCIR found that 19 of 35 insurers were using credit scores for property insurance and an additional 6 per cent planned to do so by 2012.

The way that insurers use your score to calculate policy prices also varies from province to province. For example, in Alberta and Ontario, a firm can use your credit score to determine the cost of insurance for your home, but not for your vehicle. Also, the use of your credit score is much more widespread in Quebec, where 86 per cent of insurers surveyed say they use it when quoting private passenger vehicle policies. On the other hand, Newfoundland and Labrador prohibit the use of these scores for auto and property insurance.

If you're shopping for a policy, be sure to ask if your credit score is used as part of the screening process or to determine your rates. The good news is that"...a credit score is only one criterion," says Masnyk. "And the weight of your credit score differs from company to company."

See related: What makes up a credit score?, 6 ways to improve your credit score

Updated July 27, 2017

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