Use of Credit Score by Insurance Companies - Should It Be Allowed?

Over the last few months, the New Brunswick Insurance Board gave insurance companies the OK to ask customers, and potential clients, permission to use credit scores when determining their auto insurance rate. 

Insurance companies insist there is a direct correlation between poor credit scores and bad drivers. However, according to the CBC, for a province that has “an unusually high number of people struggle with personal finances,” this could be disastrous, especially because over 7,000 people in New Brunswick filed for bankruptcy in the last two years. 

But credit scores and car insurance aren’t anything new. Insurance companies want to check your score and battle with the provincial financial regulators for access. 

Are insurance companies allowed to check your credit score?

It’s a common practice in the United States and for some countries in Europe. In Canada, it’s a different story. 

Home insurance companies across Canada check your credit score because home insurance does not have the same regulations. 

For auto insurance companies, the answer is yes, but it depends on where you live and whether you allow them or not. 

What provinces allow car insurance companies to check your credit score?

Province	Can they check your credit score?
British Columbia	The Insurance Corporation of British Columbia (ICBC) does not list credit scores as rating criteria.
Alberta	Yes, but only if you want additional optional coverage like collision and comprehensive or apply for a premium payment plan. The company needs your consent.
Saskatchewan	Saskatchewan Government Insurance (SGI) does not list credit scores as rating criteria, however, prepare to face a credit check if you want additional coverage through a private insurance company.
Manitoba	The government regulator, Manitoba Public Insurance (MPI), does not list credit scores as rating criteria.
Ontario	No, the practice is banned.
Quebec	No rules forbid the practice, but it’s uncommon.
New Brunswick	Yes, as of September 2021. There was legislation in 2011 to prevent credit checks, but it was never enacted.
Newfoundland and Labrador	No, the practice is banned, but you can provide for lower rates.
Prince Edward Island	Yes, but the provincial insurance regulator (IRAC) says they are unaware of any insurance companies using credit score as a rating factor.
Nova Scotia	Yes, but you can’t be denied insurance if you say no to allowing the company to access it.

 

The problem of using credit scores to determine risk

Again, insurance companies insist it’s an indicator of the risk of collisions and filing claims. However, where they get the credit score from will vary depending on credit rating firms. 

Canada’s Insurance Bureau has a voluntary code of conduct they hope and encourage insurers to use. According to the document, 85% of companies use it to obtain your consent while also considering factors beyond your control like illness, disability, identity theft, and divorce (all factors that can significantly impact your credit score). 

The code prohibits any insurance company from denying or cancelling policies based on a bad credit score or lack of history. 

It’s critical a provider not be able to deny based on those factors because the vulnerable are most at risk. People with low or no credit scores are often retired seniors, newcomers to Canada, unemployed or single-income families and small business owners using lines of credit. 

For a second, think of those struggling to find work, or recently divorced, or new to Canada. Think about your parents or grandparents. What if they have to pay more for insurance, not because they’re a lousy driver, but because life is a bit harder for them right now. A little compassion brings this discussion into perspective. 

Does an insurance quote affect your credit score?

“No, an insurance quote does not affect your credit score,” says Morgan Roberts of RH insurance. “Insurance companies run a soft credit check.” Soft credit checks have no impact on your credit score whatsoever. 

If you’re paying higher rates, Roberts recommends speaking with your broker about quick ways to reduce your premium, like re-examining your coverage, increasing your deductible, bundling with home insurance, and above all, drive responsibly. 

She adds “You can find a company that doesn't do soft credit checks. At RH Insurance, we have a few companies that offer great rates without credit checks.”

When I asked how much of a factor is your credit score in your insurance rate, she said, “It’s a pretty big factor. [It] gives a good discount. If you have bad credit or don't provide consent to the credit check, then a lot of companies don't offer monthly payment plans.” 

How to improve your credit score

Your payment history is the most significant factor in determining your credit score. 

So, always make your payments on time (or at least the minimum if you can’t). If you have trouble paying a bill, contact your credit card company immediately. Even if you’re disputing a payment, don’t skip paying it. 

Don’t go over your credit card limit, and use your credit wisely. There is something called the credit utilization ratio, which says you should use less than 35% of your available credit. In other words, if you have a credit limit of $1,000, don’t use more than $350 (or 35% of your limit). 

If you have lines of credit and auto loans, consider all of them into your utilization ratio. 

The bottom line

Check your credit score for free with companies like Equifax or Transunion and monitor it closely, especially if you have a lower score. Work to improve your credit. While it may not help your car insurance in some provinces, it will help you get better mortgages rates, car loans, and credit cards.