We all know that our credit history affects the interest rate we pay for credit cards, home mortgages and auto loans, and that a low credit score can even be prevent us from being able to obtain financing, but a credit score is not what the insurance industry uses in calculating or discounting premiums.
It is important to understand what an insurance score is and how it impacts the cost of insurance since almost 90% of auto insurance companies and 80% of homeowners insurers use credit-based scores in calculating rates and discounts.
For those that enjoy the history of things, I thought I would provide the information about how insurance scores came about, and why. In 2003, a study sponsored by several national insurance associations conducted an actuarial analysis showing the relationship of credit-based insurance scores to the propensity of loss for private passenger automobile insurance across all states.
Their study showed that auto insurance clients who had lower credit scores had a higher frequency of turning in auto claims as well as having a higher average cost per claim. The study also showed the opposite; it was clear that as an individual’s credit score increased, they turned in fewer and smaller dollar amount claims.
Insurance companies across the United States used this information to begin applying discounts or surcharges based on individual insurance scores. In California, it was determined that an insurance score would only be used as a credit, not a surcharge.
It’s important to understand that an insurance score is not the same as a credit score, which confuses clients who contact us, to say, for example, their credit score is a 781 but we are using a 691 on their insurance and ask us to fix it; believing it’s an error.
So, what makes up an insurance score? The below credit characteristics as well as accident and claim history are used to formulate a numerical point system. The categories below are believed to determine how individuals manage risk. The percentage shows the amount of influence they have in calculating insurance scores.
Payment History (40%) — Late, missed, and partial payments on all debt
Outstanding Debt (30%) — The total amount of your current debt
Credit History Length (15%) — How long you have had a line of credit
Pursuit of New Credit (10%) — Applying for new lines of credit
Credit Mix (5%) — Types of credit (credit card, mortgage, auto loans, etc.)
This is important to understand when you realize that a client in California with an insurance score under 600 can pay up to 40% more for their auto and home insurance than someone with a score over 900. Because this is such an important factor that we have control over, let us look at how you can improve your insurance score.
Concentrating on these areas will improve both credit and insurance scores over time:
- Paying your bills on time.
- Using less than 30% of your available credit.
- Avoid applying for multiple loans or credit cards
- Limit your number of credit accounts and credit cards
- Regularly review your credit report. Under the Fair Credit Reporting Act, you can obtain one free annual credit report from each: Experian, Equifax, and TransUnion. Spread them out over the year to monitor your score.
- Avoid quick credit fixes that promise to pay off your debt as they can drastically lower your score and impact it for up to 7 years.
- Make a focused plan to pay down debt without generating new debt.
- Keep a long credit history: retaining paid off credit cards and not using them has a positive impact on your score.
We hope you find this information beneficial in saving you dollars for many years to come. As always we are in business to take care of people, and are simply a phone call, text or email away if you need assistance with your business or personal insurance.