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How does credit affect insurance rates?

Most auto and homeowners insurance companies use a type of creditscore, known as an insurance score or a credit-based insurance score, todetermine a policy cost and terms.
6/23/2014

Why do Insurance Companies have to pull my credit report?
Like it or not, insurance companies may use your credit information to determine if they are willing to offer you a homeowners or auto policy and how much that will cost. How much weight, if any, your credit has on your insurance premiums varies by insurance company and by state regulations, but if your credit score is very good, there’s a pretty good chance you will pay less for insurance than your lower credit-rated counterparts.

Financial Scores versus Insurance Scores
Your financial score, or credit rating, and your insurance scores are not one and the same. Credit ratings are used to calculate the likelihood of repayment of a loan based on your financial history, and include factors such as outstanding debt, bankruptcies, length of credit history, collections, new applications for credit, number of credit accounts in use, and timeliness of debt repayment.

An insurance score, while based off certain elements that produced your credit score, is used by underwriters as a predictor of insurance losses or claims. Insurance companies may produce your score using their own methodology or may use one calculated by a company such as Fair Isaac Corporation (FICO) or LexisNexis. Whatever the method, a credit-based insurance score helps underwriters discern between lower and higher insurance risks and charge premiums accordingly. Statistically, people who have a poor insurance score are more likely to file a claim and incur greater losses, while those who have a favorable score tend to be more responsible drivers and homeowners.

What type of credit information affects my insurance score?
Again, while not every insurer evaluates your credit using the same method, your insurance score is typically created using about 20 to 30 pieces of financial data, including your debt, the length of your credit history, and your payment history. In fact, two items, your payment history and debt, make up the bulk of what factors into your credit-based insurance score. What is not factored into your insurance score? Income. Be warned! Even if you can well-afford to pay back that large loan, your insurance company may charge you higher premiums just for borrowing!

How can I improve my insurance score?
Primarily, you must take steps to maintain an excellent credit rating. Paying your bills on time and keeping your credit card use in check will help you improve your credit score over time and obtain more favorable insurance rates in the future. You can check with your state’s insurance department to better understand how an insurance company can use your credit to determine your premium and the regulations they have to abide by.

It is important to remember that credit-based insurance scores are not the only determinants in evaluating risk and establishing rates. For instance, car insurance rates are also influenced by your age, driving experience, how your vehicle is used, driving and claims history, the make and model of your vehicle(s), and your geographic location. Homeowner rates are calculated using factors such as the home’s age and construction, location, and claims history.

Regardless or your credit rating or insurance scores, consumers should always research various options when determining the best coverage for specific needs. This insurance shopping process works best when working in conjunction with your independent insurance agent, a trusted advisor for all your present and future insurance needs. By representing multiple insurance companies, they offer more choices, creating a better value for your investment.

The information on this site is general in nature. Any description of coverage is necessarily simplified. Whether a particular loss is covered depends on the specific facts and the provisions, exclusions and limits of the actual policy. Nothing on this site alters the terms or conditions of any policies, nor does it provide any guarantees. You should read your specific policy for a complete description of coverage.

 

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