Why do Insurance Companies Ask for Soft Credit Checks?

When purchasing a homeowners insurance policy, you may be asked if the insurance company can use your credit score when determining your premium. But do you know the reason why? Will an insurance company offer a discount based on having a higher credit score?

This is known as a soft credit check. Insurance companies offer the option to include your credit score as a factor in the rating of your homeowners insurance policy. Research has shown that people with higher credit scores tend to make fewer insurance claims. Whether this is because they maintain their property better, or because they are in a position to pay for damages out of pocket, people with a stronger credit rating are statistically less likely to make a claim. They are, therefore, often rewarded with a lower premium.

Over time, credit scores fluctuate, and having a lower credit score does not necessarily indicate financial instability. Under the Insurance Bureau of Canada’s (IBC) Code of Conduct for Insurers’ Use of Credit Information, insurance companies are not permitted to decline or cancel an insurance application or policy based solely on an applicant’s credit score, and they are required to use the most up-to-date credit information available.

Since credit is such a personal thing, some people are not comfortable with consenting to its use when applying for insurance. The use of credit scores is always optional, but refusing to consent means you likely won’t be able to access the best rates available to you. Savings can be as low as few dollars, or as high as hundreds, and even thousands on high premium policies.

A few things to know

Having a high credit score doesn’t automatically guarantee you will qualify for a lower premium. Your credit score is only one of a number of factors used to determine your rate. Even individuals with great credit scores won’t always see a reduction in their premium.

Some insurance companies provide an automatic discount if you consent to a soft credit check, no matter what your credit score may be. The discount is higher for those with high credit scores, but some companies offer you a small discount just for trying, and every bit helps.

If you consent to rating by credit score on your personal insurance policy, your credit score isn’t negatively impacted. Insurance companies perform what is known as a “soft hit” on your credit. This is not a formal credit check like when you apply for a loan or get financing for a large purchase.

Protection of your personal information is a priority. Your credit rating is never shared with anyone. Your broker and the insurance company don’t see your credit score.

You can also withdraw your consent at any time, but depending on the insurance company, you may need to do this in writing.

A soft credit inquiry occurs when a vendor checks your credit report for informational purposes. This type of credit check doesn’t impact your credit score and doesn’t show up on your credit report.

For questions about using your credit score when shopping for insurance, speak to one of our insurance specialists at AIM. They are real people looking to help you in any way they can.

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