How your credit score affects your insurance rate.
PHOENIX, AZ -- You may have a great driving record, but it may not matter if you have a poor credit score.
Many insurance companies check your credit score to determine how much you pay.
"It's not new and it's relatively common," said Richard Usher who is a principal partner with independent insurance agency Hill & Usher.
With 18-years experience in the insurance industry, Usher is not totally sold on the idea of checking a persons credit before setting their insurance rate.
"I'm not sure that it is absolutely necessary to do," said Usher while standing in his Phoenix office.
Usher said not all insurance companies conduct the credit checks, but many consider it routine and said he rarely does credit checks.
"I have done it on certain policies, but I don't make a habit of it," said Usher.
Many large, well-known insurance companies have ranking systems for customers after undergoing a credit check.
Hill said it's referred to as a "tier system."
Where you fall on that "tier system" determines how much you pay.
If your credit score is good, you get a lower tier. The lower the tier, the lower your rate.
If your credit score is poor, you get a higher tier, which means you may pay more.
Usher said some insurance companies see people on those lower tiers as a risk who may not make their monthly payments.
"And some companies, not ours, believe the lower your credit score, the more likely it is you're going to have a claim and the more claims you'll file and the more severe the claims are," said Usher.
Some states are concerned the credit checks are discriminatory against certain races, lower income families, and even particular zip codes.
"And because of those concerns, that's one of the reasons why Arizona requires that (credit checks) to be disclosed," said Usher.
Therefore, you should be notified by your insurance carrier if they have or plan to do a credit check.
Usher says anyone signing up for insurance should ask many questions, and feel comfortable enough to do so.
"I encourage my clients to ask me anything, that's what makes people confident," said Usher. "You should always ask if they're doing a credit check on you, but they're supposed to tell you in the first place."
You should also ask what tier you're in.
"You might even ask the person you're looking at for insurance what kind of impact it (credit check) may have on you," said Usher.
According to financial experts, the credit checks conducted by insurance companies do not effect your overall credit score and are not in-depth checks like those that take place when you buy a car or house.
Aside from your overall credit score, here are a few factors that may influence your insurance risk score:
Payment history
Unpaid debt
Overall credit history, the longer the better
Number of new accounts
Balance of open accounts
Experts also recommend contacting your insurance company if you credit rating improves which could change the amount you pay.
According to published reports, the auto insurance industry is most likely to conduct credit checks.
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