Chances are you probably have heard about the use of credit information in determining insurance rates. This practice, known as credit-based insurance scoring, is common in the insurance industry.
A credit-based insurance score (also known simply as an insurance score) should not be confused with your credit risk score. Although both are based on your current credit report data, there are important differences between the two scores. A credit risk score is a number indicating the likelihood that you'll be late paying your bills, often used by banks. An insurance score uses certain elements of your credit history to predict how often you are likely to file claims and how expensive those claims may be.
Insurance scores are not the only factor used by insurers to set pricing, nor to deny insurance to any applicants. Credit information is just one of the many factors used to predict the level of insurance risk you represent. When evaluated with other information like claims and driving record history, your insurance score helps insurers determine if you qualify for underwriting requirements, and what rate you'll pay.
Combining so many other components along with portions of your credit history helps insurers properly evaluate risk to charge rates that most closely align with the likelihood of having a claim. Other advantages of insurance scores include:
- Consistently Applied Standards: Insurance scores help automate straightforward decisions, in combination with the insurers determine if you meet their underwriting requirements and other criteria. Every applicant is treated with a consistently applied standard.
- Nondiscriminatory Practices: Insurance scores are nondiscriminatory and use no data on gender, nationality, ethnicity or income. Only credit-related information governed by the federal Fair Credit Reporting Act is included.
- Accurate Decisions: Insurers can more accurately forecast future behavior to ensure you pay a rate that most closely corresponds to the level of insurance risk you represent. This means if you are less likely to have a claim that results in a loss for the insurer, you will pay a lower premium. Similarly, those who will likely have larger or more frequent claims will pay a higher premium. Insurance scores help prevent you from paying more than you should to help cover someone else's future claims. According to FICO® Insurance Scores, the majority of people have good credit, even during turbulent economic times, so most people will pay less for insurance when insurance scores are used in the policy premium decision-making process.
- Overall Savings: Insurance scores help insurers streamline operations by better utilizing key underwriting information and other resources. This allows the savings to get passed along to you and with insurance scores being straightforward, you have the added benefit of prompt underwriting decisions—meaning you get better service, faster.
Since the information in your credit report ultimately affects your insurance score, it is important to routinely monitor your credit report. The Fair Credit Reporting Act guarantees consumers access to their credit report for free from each of the three nationwide credit reporting companies – Experian, Equifax and TransUnion – every 12 months. The request can be made for a free report online, by phone (1-877-322-8228) or by mail. To request a copy by mail, a consumer must fill out the Annual Credit Report Request form and mail it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. You can also visit the Federal Trade Commission’s website for more additional information about obtaining a free credit report.
To further answer questions you may have about credit-based insurance scores, click here.