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Credit Score and Insurance Score of Auto Insurance

The companies generally do not look at the actual credit report. They just look out for the credit score. In fact they receive the credit score from any of the three major national credit depositories – Equifax, Experian and TransUnion. Credit scoring is a method to determine the likelihood that credit users will pay their bills.

Credit scores are prepared by analyzing a borrower’s credit history. The factors considered while calculating a credit score are :

The duration for which credit is used.

The amount of credit used versus the amount of credit available.

Record of whether payments are made in time.

Employment history.

Length of time at present residence.

Negative credit information such as bankruptcies, charge-offs, collections, etc.

Now the insurance score is based on the FICO score. It is a credit score developed by Fair Isaac and Co.

Raise the FICO score: One can raise the FICO score over a period of time through the following ways:

Pay your bills in time. Late payments can have a serious impact on your score.

Reduce your credit-card balances. If you are “maxed” out on your credit cards, this will affect your credit score negatively.

If you have limited credit, obtain additional credit. Not having sufficient credit can negatively impact your score.

Do not apply for credit frequently. Having a large number of inquiries on your credit report can worsen your score.

Insurance score: There is another concept called insurance score which also plays an important role in determining the cost of insurance. An insurance score predicts whether a person is likely to file a claim in the future. This helps the insurance companies to determine the amount of premium to be charged. An insurance score is a numerical ranking based on a person’s credit history. It predicts the average claim behavior of a group of people with essentially the same credit history. Typically a good score is assumed to be above 760 and a bad score is below 600. People with low insurance scores tend to file more claims. But there are exceptions. For example, It has been found that teenagers as a group have more accidents than people of other age groups. But there are some teenager drivers who never had an accident.

Insurance scores do not include data on race or income because companies do not collect this information for insurance. Insurance score is not much concerned with the tendency to take a new credit. Instead it focuses on the issue of stability.

Studies have shown that how a person constructs his financial planning is a good predictor of insurance claims. It is accepted that people who manage their finances well can also manage other important aspects of their lives, such as driving a car. The factors such as geographical area, previous crashes, age and gender, insurance scores collectively enable auto insurers to price more accurately, so that people less likely to file a claim pay less for their insurance than people who are more likely to file a claim. Insurance scores are useful to the insurer to differentiate between lower and higher insurance risks people and thus to charge a respective premium.

There exists a kind of debate regarding the use of insurance credit scoring. Insurance companies claim that the use of these scores helps them to issue new and renewal insurance policies based on objective, accurate, and consistent information, better anticipate claims and better control risk. This enables them to offer more insurance coverage to more consumers at a fairer cost.

Opponents of insurance credit score argue that companies can use insurance credit scores to non-renew coverage regardless of whether a claim has been filed or premiums have been paid in time and that credit scoring focuses on a consumer’s economic status. People with poor credit scores sometimes pay 4 to 5 times as much as the other consumer.

One aspect of insurance score is very important. While it is easy to obtain the credit score, it is difficult to get the insurance score. There is no hard and fast rule on the part of companies to hand it over and most companies don’t.