Insurance and Your Credit Report
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October 10, 2006 | By: 
Comments (5)Insurance companies use several factors to determine your premiums, including your driving record, age, the type of car you drive, marital status, and your address. But increasingly, companies are using your credit history as an indicator of how likely you are to file a claim. Called an insurance risk score, this controversial number is calculated using a special formula similar to a credit score but developed specifically for insurers. This formula is currently unavailable to consumers; however, many states are currently considering legislation to regulate the use of this score. In fact, Maryland and Washington have passed laws that restrict the use of credit information by insurance companies.
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A few things have been made public about your insurance risk score recently. We now know that five main financial factors are evaluated to calculate your insurance risk score:
1. Your payment history: Your record of paying credit bills in the past, number of adverse public records (i.e. bankruptcy, collections, liens), and the amount of delinquencies on your credit record account for about 35% of your insurance risk score. This is the largest factor in your insurance rating.
2. Amount of debt you owe: The number of accounts you have open, the types of accounts, and the amount you have charged all combine to count as 30% of your risk score.
3. Length of credit history: The amount of time that you've had credit and the specific length of time that you have had certain accounts make up 15% of your risk analysis.
4. New credit: 10% of your risk analysis is calculated based on your recent credit activity. Your number of new accounts, recent inquiries, and efforts to re-establish troubled credit are grouped into this category.
5. Types of credit in use: The number and activity of credit accounts including credit cards, retail store accounts, and mortgages count for another 10% of your risk evaluation.
Although consumers can't access their own insurance risk score, simply knowing that your credit history is used by insurers can help you get a better deal. If you have excellent credit, you may want to use it to your advantage and shop around for the best insurance rates possible. If you have troubled credit, you may want to stay with your current insurer until your finances improve.
By understanding some of the credit factors that go into your insurance assessment, you are empowered to improve your insurance risk score. Take charge of your credit and get the insurance rate you deserve.
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Comments (5)
Remove Bankruptcies
4 hours ago
Credit repair has become very important. Many people dont even know what their credit score is. There is so much identity theft that a person should get their credit report at least every year. Look over it VERY carefully and make sure everything is correct. IF you find things wrong with it then contact the credit reporting agency. Dispute the item. If you do not know how to dispute an item you can get a book called The Ultimate Credit Repair Book and it will show you how you can remove items easily
Trish Legarda
December 16, 2006 07:33
This is a nice blog, thanks! It may sound silly that you have to watch your credit report, but you would be amazed at the number of people who actually have errors on their credit report and they are completely unaware of it.
Evan
November 2, 2006 12:41
Good point Monique, while insurance companies need some type of scale to grade different applicants on, it seems harsh that the credit scores must come into play again.
Monique Attinger
October 22, 2006 15:30
It is a real concern to consumers that a credit score can be used against them in yet another area of their lives! I have to agree that it seems a discriminatory to think that because a person has had credit problems that they may be more likely to file a claim and are therefore higher risk. Is there real data to support this move by insurers?
Juston Garland
October 12, 2006 00:32
Do consumers need to pay more for auto insurance for having bad credit? Insurance companies say that people with bad credit are more likely to file a claim, this allows them to charge more to people who need the money the most. I believe it should be more about past claims than credit history. Just because someone could not pay off a bill, or has had problems with their credit does not make them any different in my personal view.