One of the questions I am asked regularly is about how & why most insurance companies have decided to use credit as an important determiner in setting individual premiums for our auto and home insurance.  At first blush the two would seem to have no real correlation to each other.  How could a low credit score possibly predict the odds of my having an auto accident  or claim on my home?  

While I claim no abilities as an insurance statistician,  somehow there is  a strong correlation.  In fact the relationship is so strong that an insurance company who does not use credit scoring will soon find itself writing insurance on risks which other companies have decided not to insure, or charging less than they ought.   Too many years of that and that company will be losing market share, charging too much for the customers they do keep and generally be out of touch with the marketplace.  So the overwhelming majority of insurance companies must use it in one form or another as an underwriting component to stay competitive.   

State legislatures throughout the United States have looked upon this practice with some discomfort.  Is it inherently discriminatory to use a low credit score to charge more premium?   A couple of states have banned the practice (California and I believe New York) but for the most part when our lawmakers see the strong correlation they simply can't deny it as an underwriting tool.  Let's not forget the other side of the coin is that those with good or great credit are getting significant savings on their insurance.

The bottom line is self evident.  Guard your credit score zealously.  Not only will you get a better interest rate on your home purchase, you will pay less for your insurance. 

One final note:  If life throws you a curve (divorce or major illness) and your credit took a hit, you can appeal to many insurance companies and they potentially will pull credit out of the mix.