Insurance Score Explained
Insurance is necessary to protect a person's big investments, namely a home and vehicles. In the event of a tragedy such as a fire, most people would not have the money to totally rebuild their home. While everyone needs insurance, the amount each individual pays for insurance coverage varies. Different rates are offered by different companies and their various plans, but much of the price of a monthly premium is calculated by the insurance company assigning each person a "credit score."
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Determining Premiums
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Insurance companies use models to determine the probability for a claim on a house or car insurance policy. This is based on a variety of factors. For example, a home that has smoke detectors, is built to the latest fire codes and is located close to a fire hydrant or a fire house is considered a lower risk than a home that does not have these amenities. However, some insurers bring another variable into their equation to determine the price of premiums. They use a score computed by a credit reporting agency.
Meaning of an Insurance Score
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The probability of a policy holder filing a claim on his coverage is calculated in a formula that yields a number, or score. This number represents your risk to the insurance company at the present time. A high score indicates a lower risk for the insurance company, and therefore the company can offer a lower premium.
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Unfair System
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Credit-based insurance scores are common, although they may be unfair to some policy holders. A person who has a bad credit rating will have that factored into his insurance score, which lowers his score. Consumer Reports notes, "That's unfair, because having a low credit score doesn't unnecessarily make someone more likely to have a car accident or a house fire." The history of an individual filing claims and his driving record should theoretically be among the most important factors in determining premium rates. Although insurance companies cannot base their rates on race or ethnicity, low-income individuals may be penalized by paying higher insurance premiums simply because their credit score is low.
Creation of Insurance Score Systems
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The most widely used credit scoring formula is called the FICO score, an acronym for the Fair Isaac Corporation, the company that created the system. The three major credit reporting agencies each use their own version of the FICO score in developing their formulas: Equifax uses InScore, Experian uses the Experian/Fair Isaac Insurance Score and TransUnion uses the Fair Isaac Insurance Risk Score.
Increasing Your Insurance Score
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Policy holders for those insurance companies who incorporate credit scores into their premium rate calculations should work toward or maintain good credit scores to get the best insurance rates. Pay all bills, credit cards, mortgage payments and the like on time. Avoid delinquent and late payments. Keep credit card balances low. Accounts that have been opened for a long time hold greater weight than newly opened credit accounts. You can check the accuracy of the data on file at the three credit reporting companies.
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