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 If you've recently applied for a homeowner's insurance policy or even car insurance then you might be familiar with your insurance credit rating. If you're buying a home or new car, then you should be aware that your credit score can affect the premiums you pay on insurance.
In this publication we're going to explain why an insurance company might want to look at your credit score. We're also going to explain how these companies can use the information found on your credit report. We'll finish up by explaining what you can do to improve your insurance credit score.
Insurance Credit Scoring
Both federal law and state law allow insurance companies to look at your credit information, without your knowledge, and as provided under the rules of the Fair Credit Reporting Act. And because the law only allows credit reporting agencies to use certain information in calculating a rating, they've developed what is called an insurance credit score.
Typical inputs to this credit score would include monthly bill payment patterns, the total number of credit cards and / or loans outstanding, collection activity, total outstanding debt and the amount of history on an account.
How Insurance Credit Scoring is Used
Credit scoring agencies use this information to calculate a credit score which is a number that insurance companies then use to help them determine the monthly or annual premiums to charge. Many insurance companies believe that there is a direct relationship between a consumer's payment history or financial dependability and insurance losses.
For example, an individual or family that demonstrates less financial dependability may be more likely to file an insurance claim. Therefore this individual should also pay higher premiums on their insurance policy.
Under the law, insurance companies cannot increase your insurance premiums if you don't have sufficient credit history to calculate a credit score.
Specific Uses of Insurance Credit Scores
If you have a personal auto insurance policy or homeowners insurance, then your insurance company may use the information in your credit history for the following:
- Ratings - your rating determine how large a premium is charged on an insurance policy. So negative factors in your credit history can increase the cost of your insurance.
- Underwriting - this is the process of determining whether or not an insurance company will insure you or renew an existing policy.
Calculating Insurance Credit Scores
Each credit rating agency will have a slightly different approach to calculating an insurance credit score; however the elements that go into the score will be similar. Typically those factors would include:
- Bankruptcies, collection activity, home foreclosure, tax liens and other information available through public records.
- Frequency of late payments or late payment patterns to credit card companies or other creditors and lenders.
- Total number of lines of credit an individual has outstanding.
- Credit in use and credit history. In general, the more credit in use and the more history on file, the better the credit rating.
- Outstanding debt relative to the amount of credit offered. Individuals that max out their credit are viewed as riskier individuals.
Good Insurance Credit Scores
It's very difficult to answer the question - What is a good insurance credit score? That's because each insurance company is free to choose what they believe is or is not a good score. In other words different insurance companies may view the same exact credit score in a slightly different way or apply a slightly different premium policy to the same score.
Protections offered Consumers
Staring in January of 2003, consumers were offered some protections in terms of how insurance companies could use credit information. This includes information that cannot be used to calculate a score including:
- The total number of credit inquiries in your credit file.
- The total amount of available credit that is unused.
- An insufficient credit history to develop a score or a lack of credit history.
- Debt associated with the purchase of a new vehicle or buying a new home.
- The types or issuers of credit cards and debit cards carried.
This type of information also cannot be used to cancel or non-renew an existing insurance policy or deny coverage to a family or individual.
Insurance Premiums and Credit Scores
Now that you've got a better understanding of what types of information goes into an insurance credit score, it's time for a little reminder about how that information is used. Insurance credit scores are just one of several factors used by insurance companies to determine policy premiums.
Auto insurance as well as homeowners insurance companies base premiums on other factors including the cost to replace a home or car, where the home is located and the breadth and depth of insurance offered in the policy. For example, if the policyholder elects to increase their liability insurance, then that drives up the cost of the insurance.
Improving an Insurance Credit Score
Let's finish up this article by addressing the question:
How can I improve my insurance credit score?
The most efficient way to improve your credit score is to first find out what factors your insurance company uses to calculate their insurance credit score. Most credit reporting agencies, such as Fair Isaac (which developed the FICO score) and Choice Point will provide insurance companies with up to four credit factors - each of which can have a positive or negative affect on your insurance credit score.
You can ask your insurance agent or call your insurance company directly. They should be able to provide you with guidance on the factors used to calculate their score. If you believe there are errors in your credit history, there is a way to repair this damage. In our article on the Fair Credit and Reporting Act, we outline the exact steps a consumer can take to get their credit report corrected.
About the Author - Credit Scores and Insurance Premiums
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