Q&A: Can my credit score affect my insurance rates?

In Canada, different organizations and individuals have the right to view your credit score, including prospective employers, landlords, banks, car leasing companies, and more.

While your credit score is typically used by potential lenders to determine how risky it would be for them to lend you money, other organizations — like insurance companies — can use it to project how risky you are in your day-to-day life. Here’s what you need to know about your credit score, including how it’s calculated, how it can affect your insurance premiums, and how you can improve it.

What is a credit score?

Your credit score is a three-digit number (ranging from 300 to 900) that is calculated using a variety of information in your credit report, which summarizes your credit history. Your credit report is created when you apply for credit for the first time, and it’s constantly being updated as lenders send information about your accounts to credit reporting agencies.

A top credit score in Canada is 900, with anything above 760 being considered excellent. If your score is under 650, your score is in the fair to poor range, and you could struggle to get new credit. But don’t worry — your credit score changes over time as your credit report is updated, and you can improve your score by using your credit responsibly.

How is my credit score calculated?

Your credit score is calculated using a formula that pulls certain data points from your credit report. Each data point is weighted, meaning some will have a bigger effect on your score than others. The following five factors are most important in calculating your credit score:

1. Your payment history. Your payment history for things like household bills and credit card payments plays the biggest role in determining your credit score, accounting for 35% of the calculation. To determine if you’re creditworthy, lenders will look at your payment history to see if you’ve consistently made your payments and if you’ve done it on time. If you get into the habit of missing payments — especially two in a row — on a regular basis, your credit score will likely drop significantly.
2. Your credit utilization ratio. Your credit utilization ratio — or how much credit you use on a regular basis compared to how much you have — accounts for 30% of your credit score calculation. If you have a $2,000 credit limit and consistently have a balance of $1,600, you’re using 80% of your available credit, which could lower your credit score.
3. The length of your credit history. Your credit history accounts for 15% of your credit score calculation, and lenders like to see a history of good credit management. If you don’t currently have a credit card, don’t worry — if your phone bill, internet bill, or student loans are in your name, they count towards your credit history, so you likely already have a credit profile. If they aren’t in your name, consider getting a no-fee credit card that you can use infrequently to start building your own credit history.
4. Your recent credit activity. Your recent credit activity accounts for 10% of your credit score. Whenever you apply for new credit, a hard credit inquiry is documented in your history, which can result in a loss of 10 points on your credit score. While this typically isn’t an issue, as your credit score will recover after a few months of on-time payments, it can put a serious dent in your credit score if you apply for several cards in a short period of time.
5. The types of credit you have. The final 10% of your credit score calculation comes from the types of credit you have in your name. This was a bigger factor in the past, as lenders would want to see if you were constantly using your line of credit because it implied you were short on cash. Nowadays, it doesn’t seem to matter as much, but it’s still good practice to have different types of credit in your name.

Your credit score will also be affected if any of your debts are sent to a collection agency or if you file for insolvency or bankruptcy.

How does my credit score affect my insurance premiums?

Many insurance companies across Canada use your credit score as a factor when calculating your home or car insurance premiums.

While your credit score is normally used to show lenders that you can be trusted to make your monthly payments, some insurance companies believe that your credit score can also be used to assess the level of risk you pose as an insured. Using this logic, a person with a poor credit score would be considered to pose a greater-than-average risk, while the opposite would be true for a person with a good credit score. Some argue that people who are responsible with their credit are likely to be more responsible with maintaining their homes and vehicles.

Laws about whether an insurer can use your credit score to calculate your rates varies from province to province. Reach out to your licensed insurance broker to see what the rules are in your province.

How can I improve my credit score?

Whether your credit score is lower than you’d like it to be or you’re just looking to make a good score great, use your credit responsibly by keeping the following tips in mind:

• Set up automated payments. Credit companies consider how much and how often you’re paying off your debt. By automating payments, you can make sure you’re always paying your bills on time and are building your credit score in the process.
• Be mindful of how much of your available credit you’re using. Your credit utilization ratio is used by credit companies to determine how “risky” your spending is. For example, if you’re consistently using 80% of your available credit, it could hurt your score. Try to keep your credit utilization ratio below 35%.
• Don’t remove old credit card accounts that are still linked to your report. If an old credit card is paid off, it can actually help your score because it shows you have experience paying off a credit card, which builds your credit history.
• Don’t apply for too many new credit cards. When you apply for a new card, the credit company will do a credit inquiry into your credit history. A credit inquiry can appear on your credit report for up to 36 months. If you have multiple inquiries on your report, you may raise some red flags with potential lenders as well as lose points.
• Use different types of credit. It’s better to have a mix of different types of credit (like a credit card, a car loan, and a line of credit) than it is to only have a credit card. But as always, make sure you can afford to pay back any money you borrow, or you could hurt your score by taking on too much debt.