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FAQ: Why Do Insurance Companies Check Credit?

Thursday, 29 July 2021

You’ve requested an insurance quote and the broker asks if you consent to a credit check… wait, what? Why do insurance companies check credit? Is it even legal? Will it benefit you to say yes? Let us answer all your questions about why insurance companies check credit.

What is a Credit Score?

Your credit score is a number between 300 and 900 that represents how reliable you are as a borrower based on your existing debt, payment history, and credit history. The higher your credit score, the better. With a higher credit score, it is more likely that lenders will loan you money with favourable terms such as lower interest rates and lower payments.

Will a Credit Check Impact My Credit Score?

You may have heard that credit checks can ding your score, but not all credit checks are created equal; there are hard checks and soft checks. To keep it simple, insurance companies use a soft credit check, which will not impact your score.

Are Insurance Companies Allowed to Use My Credit Score?

Before we even ask, ‘why do insurance companies check credit?’ is it even legal for insurance companies to access your credit score? Each province has their own legislation, which we will explain below. Regardless of province, there is a Code of Conduct instituted by the Insurance Bureau of Canada to protect you as the consumer and enforce transparency from insurers. The Code includes the following conditions:

  • Your insurer must get your informed and express consent before checking your credit.
  • They cannot deny or cancel coverage solely because you did not allow them to access your credit information.
  • If you believe your credit rating has been negatively affected by extraordinary life events, insurance companies must provide guidance for such circumstances.
  • If you don’t have a credit history, insurance companies must determine rates and underwriting decisions based off other relevant information available.

Why Do Insurance Companies Check Credit?

Now the BIG question: Why do insurance companies check credit? Your credit score says more about you than you might think – it ultimately shows lenders how responsible you are with your money. It’s also been found that there is a direct link between a person’s credit score and the frequency and severity of insurance claims. This is why insurance companies check credit – it’s helpful to determine your risk level and thus your insurance rates as well.

Depending on your province of residence, your credit score can affect your home insurance and car insurance premium. Consenting to a credit check could save you money on your insurance. Insurance companies use this advantage in hopes to entice low-risk clients.

Does Your Credit Score Affect Home Insurance?

All provinces in Canada (except for Newfoundland & Labrador) permit insurance providers to check credit for home insurance. In most cases, your home insurance rate will not go up if you have a less-than-ideal score. Generally, only a good credit score will impact your rate – in a positive way resulting in discounts. Rest assured that your credit score isn’t the only factor they consider either; it is used in conjunction with many other variables such as claims history, age of home, geographical location, and so on.

With some carriers, it is possible to see an increase in your home insurance rate based on your credit score. This is where using an insurance brokerage like Billyard Insurance Group can give you an advantage! You are never limited to one price – we can shop to find the best rates for you.

Does Your Credit Score Affect Car Insurance?

Credit scoring for auto insurance is a bit more complex in that there is more variance across each province. Below you will find each of the provinces that Billyard Insurance Group currently services and their respective regulations.

In Ontario

At the time that this blog was published (July 2021), it is against the law for auto insurance providers to use your credit score to determine your rates in Ontario. If you are purchasing auto insurance in Ontario, you are protected by this legislation from your insurance company accessing your credit history.

In Alberta

When purchasing car insurance in Alberta, your broker must receive explicit consent to get your credit score. You cannot be denied coverage if you refuse. You may also opt out of a credit check if you are purchasing a basic, liability-only policy, but at BIG, we almost always recommend getting a more comprehensive policy for your vehicle to help pay for repairs. To learn more, visit our blog about Physical Damage Coverage.

In Nova Scotia

If you are shopping for insurance in Nova Scotia, insurance companies are allowed to use your credit score to determine rates, however, not all companies in Nova Scotia actively do so. For anyone who might feel disadvantaged by a credit check, BIG can help you find one that doesn’t use it as a factor.

These regulations are always subject to change based on provincial legislation. Luckily, you can trust your BIG insurance broker to know and follow the current rules.

 

If you have more questions about how credit scoring can impact your insurance rate, contact one of our BIG brokers. We love to answer our clients’ questions, including, ’why do insurance companies check credit?’ so that you can feel confident in the insurance purchase you make. If you’re ready to save BIG on insurance, get a quote today!