Credit-based Insurance Scores, Car and Homeowner’s Insurance Rates

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Drivers who have low credit-based insurance scores may pay more for auto insurance than those with better scores. Your credit-based insurance score is based on aspects of your credit report and is a snapshot of your risk for filing an insurance claim at any given time. The same situation exists with homeowners when they buy homeowner’s insurance. Although there is a correlation between low insurance scores and increased frequency of filing insurance claims, insurance experts do not know why the link exists.

Insurance agents use credit-based insurance scores as an indicator of risk for increased filing of claims and will charge a higher premium in the face of a lower insurance score. They assess the stability of your credit history over time, such as repeatedly being late on paying credit cards or other loans, rather than recent credit card applications.

Statistics from the Insurance Information Institute, a trade organization for insurers, show that the group of drivers with the lowest credit scores file 40% more claims than the group of drivers with the highest credit scores. As a result, if you are a driver in the poor credit score category, expect to pay 20 to 50% more for car insurance. In fact, those with a clean driving record and a poor credit score will pay more for insurance than those with poor driving records and good credit scores.

It is possible to obtain your insurance score online for a small fee. TrueCredit is an online business that offers insurance scores for both drivers and homeowners who want to see why they may be paying more for their insurance. Sites that offer auto and homeowner’s insurance scores online also give advice on how to increase your credit score. Some tips on improving your credit score include: identifying and removing errors from your credit report, finding a trusted friend to allow you to piggyback onto their good credit report, paying your bills on time, avoid paying off a revolving debt all at once, and keeping zero-balance accounts open rather than closing them.

Some question the ethics of using your credit score to determine insurance rates, since it unfairly discriminates against minorities, those who have been laid off and the indigent. Due to the tendency of agents to lean too heavily on credit scores to set premiums, some states limit insurer’s access to them.

For car insurance, agents look at many factors, including the age and residence of the driver, plus the vehicle model, age of driver, marital status, and credit record to decide which pricing tier is used. The number of pricing tiers has risen from seven to 384 which means there are numerous combinations of factors that can influence your premium. Credit-based insurance scores will eventually influence premiums for health and life insurance as well.