Insuring your home, vehicle(s), and belongings is one of the smartest financial decisions you can make, protecting you from loss, theft, or damage. However, what many people don’t realize is that insurers often use our credit reports—compiled by agencies like Experian and TransUnion—to assess how much of a risk we pose, and in turn, how much to charge us for coverage.
The tricky part is that many consumers are unaware of this practice, and there’s no transparent way to understand how these internally generated credit scores influence insurance premiums. A 2010 survey by the Insurance Brokers Association of Ontario revealed that a staggering 78% of consumers had no idea that their credit scores could be used this way.
While it’s illegal for insurers to use your credit score without your explicit consent, the fine print on most insurance applications typically discloses that the insurer will review all aspects of your standard credit score, including your payment history, types of credit, outstanding debt, length of credit history, and more.
The difference in costs based on your credit score can be dramatic. Steve Masnyk, a spokesperson for the Insurance Brokers Association of Canada, points out that someone with an excellent credit score might pay just $500 for a policy, while someone with a poor score could be charged up to $4,000 for the same coverage.
Unlike general consumer credit reports, which you can access, the credit scores used by insurers are not available to consumers. This lack of transparency has been criticized by the Canadian Council of Insurance Regulators (CCIR), a voluntary body focused on insurance policy issues. The CCIR has raised concerns about the “lack of clarity” and “lack of transparency” in how these scores are used by the insurance industry.
Much like standard credit scores, the insurance credit scores are based on your payment history, type of credit used, outstanding debt, length of credit history, and other factors. However, once an insurance company generates this private score, you—the consumer—have no way of knowing how it’s weighted or even if it’s being used to determine your policy. The formula is proprietary and closely guarded. “The main reason is because it’s a competitive issue,” Masnyk explains. “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.”
In a 2009 survey, the CCIR found that 19 out of 35 insurers were already using credit scores for property insurance, with an additional 6% planning to adopt this practice by 2012.
How insurers use your credit score to calculate policy prices can vary significantly from province to province. For instance, in Alberta and Ontario, a company can use your credit score to determine home insurance costs, but not for auto insurance. Meanwhile, the practice is far more common in Quebec, where 86% of insurers surveyed use credit scores when quoting private passenger vehicle policies. Conversely, Newfoundland and Labrador completely prohibit the use of credit scores for both auto and property insurance.
If you’re in the market for a new insurance policy, it’s important to ask whether your credit score will be used in the screening process or to determine your rates. The silver lining is that a credit score is just one of many factors considered by insurers. “And the weight of your credit score differs from company to company,” Masnyk adds.
Understanding how your credit score could impact your insurance costs is essential, but it’s also a reminder to keep your credit in good shape—not just for borrowing, but for protecting your assets, too.
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