Credit Scoring...a term that can strike terror! How to create it, manage it, and not be hurt by it is an integral part of every consumer’s life. I have to believe that most consumers (myself included) would put a love of credit bureaus right up there with the IRS. As far reaching as credit scores have become in our life, who would have ever imagined that your credit score would have a significant impact on what you pay for auto and home insurance. It is called an insurance score and it has significant impact on your pocketbook!
The use of credit scores in insurance has become very wide spread. Over 90% of all insurance carriers operating in the U.S. use some form of credit-based insurance scoring. While the vast majority of the insurance industry feels insurance scoring through credit is an incredibly accurate predictor of one’s propensity to loss, there is significant conflict surrounding the practice. Detractors feel that the practice is patently unfair and targets certain ethnic groups and races. Others feel that too many “good” insureds tumble through the insurance scoring gaps and are unfairly targeted. Several states have taken up the anti-insurance-scoring cause and are looking deeply into the issue. Chances are good that this issue will be around for quite awhile.
What is an insurance score?
Credit-based insurance scores are confidential rankings based on your credit history. They are not a measure of your financial assets, but supposedly measure how well you manage your financial affairs. The insurance score is established by the insurance carriers themselves, based on your credit score.
Why are insurance scores used?
Insurance carriers are convinced (via several years of statistical data) that there is a direct correlation between above average credit and low loss history. The simple explanation is that the responsibility needed to adequately manage one’s personal finances are the same “responsible behaviors” (such as home and auto maintenance, operating vehicles in a safe manner, etc) that result in fewer and smaller losses. In short, the data seems to show that financial stability is usually reflective of stability in the balance of one’s life.
What is the net effect?
Ironically, the net effect of insurance scoring has, in most instances, actually lowered the cost of auto insurance for most consumers. If you have an above average insurance score, compare the premium you are paying today to the premium you paid for the same car three years ago. The cost most likely has decreased at a greater rate than the cost decrease associated with the devaluation of the car.
What laws protect me?
Laws are on the books both federally and state-by-state to help define, and in most instances, protect consumers from unfair credit practices. Some of the more significant rules from laws on the books include:
Ø Insurers are required to notify consumers if the consumer experiences adverse action, such as denial of coverage or increased premium due to the insurance score.
Ø Consumers also have the right to correct errors on their credit score and require insurance carriers to recalculate the score.
Ø Insurance carriers cannot reject new applications or cancel existing policies based on the insurance score alone.
What can you do?
Obviously, keeping your credit score as high as possible will have a very positive effect on your insurance rates. Credit scores are influenced by such things as payment history, debt owed, length of credit history, new accounts, balance on accounts, and negative records such as judgments, etc.
Beyond keeping your credit score as high as possible, individuals should be pro-active in checking their credit periodically to ensure that your history is accurate. Also be pro-active with your insurance carrier. If you feel your credit has improved, demand that the carrier re-run your insurance score as it could lower your premium.