Does My Credit Score Affect My Car Insurance Rate?

• Newfoundland and Labrador and Ontario have banned insurance companies from using an individual’s credit score to make auto rate risk calculations.
• The Insurance Bureau of Canada established a voluntary Code of Conduct for Insurers’ Use of Credit Information to enhance consumer protection.
• You can obtain a free paper copy of your consumer disclosure report (a.k.a credit report) from Equifax and TransUnion once a year.

Using a person’s credit score to determine their auto insurance rate is common in the United States and parts of Europe. But many Canadians may be unaware that, depending on the province they live in, car insurance companies may also use their credit scores as one of many factors in pricing their policies. Many provinces and territories don’t have rules forbidding insurance companies from tapping an individual’s credit score when making auto rate risk calculations. That said, it’s not common in most provinces, particularly when obtaining basic coverage. In fact, Newfoundland and Labrador and Ontario have banned this practice altogether.

However, Ontario is mulling the possibility of permitting insurance companies to use consumer credit scores when determining a driver’s premium. As of yet, no decision has been made. But the Insurance Brokers Association of Ontario is cautioning the provincial government from allowing the practice since it could “negatively impact the availability and price offered to those who can least afford insurance,” including seniors, newcomers to Canada, the unemployed, and single-income families.

After all, a low credit score might translate into a higher auto insurance premium if insurance companies deem people with poor credit more likely to make a claim. Currently, insurance providers in Ontario may only consider credit scores when calculating home insurance premiums.

Meanwhile, Alberta has a partial restriction on the use of credit scores to determine car insurance rates. Alberta auto insurance companies are not permitted to access a driver’s credit score unless they’ve applied for a premium payment plan.

The problem with using credit scores to determine a driver’s auto risk

Insurance companies may wish to use individuals’ credit scores when calculating auto rates because it can be an indicator of their likelihood to make a claim. Credit scores typically range between 300 and 900. The higher the score, the better your credit rating is. Part of the problem with insurance companies leveraging consumer credit scores to assess a driver’s risk, however, is that there is no consistency or standard among credit rating firms when it comes to how they determine an individual’s creditworthiness.

Do poor credit scores really indicate higher auto insurance risks?

Whether or not consumer credit ratings have any practical application for determining a person’s car insurance premium, insurance companies contend that there is a correlation between poor credit ratings and the risk of collisions and filing claims. The presumed connection between the two is that people who manage their finances well are more likely to keep their vehicles in tip-top shape and drive responsibly. It may be a valid argument, but it is also a contentious perspective.

Regardless, the Insurance Bureau of Canada (IBC) established a voluntary Code of Conduct for Insurers’ Use of Credit Information to enhance consumer protection in 2010. IBC says 85% of property and casualty companies across the country support its Code. Essentially, the Code encourages insurance companies to:

• Obtain your consent to view your credit report
• Take extraordinary circumstances into account (such as an illness or disability) when analyzing your credit report and score

IBC’s Code of Conduct prohibits insurance companies from:

• Denying or cancelling insurance policies based solely on a poor credit score
• Denying a policy because an applicant doesn’t have any credit history

How do I check my credit score?

You may be wondering how to go about reviewing your credit history and how credit reporting agencies rate you.

The two primary credit rating agencies operating in Canada are Equifax and TransUnion. Both will provide you with digital access to your records for a fee. You can also obtain a free paper copy of a consumer disclosure report (a.k.a a credit report) once a year. However, you are required to mail either agency a letter along with photocopies of two pieces of identification. It takes approximately three weeks for Equifax or TransUnion to respond to your written request.

More details on obtaining a free copy of your credit data are available on Equifax’s and TransUnion’s websites.