Are You Paying More for Insurance Because of Your Credit Score?
You've probably heard that insurance companies
use credit scores to determine whether to even accept you, and if
they do accept you, to determine what you'll pay for your premium.
Well, that's almost right.
Insurance companies don't use FICO credit scores. Insurance companies
often use credit-based, "insurance scores," to determine if you
are eligible for auto or homeowner's insurance, and how much you'll
The scores that insurance companies use are a little different than
the scores the lenders use. However, they are similar in that they
look at a lot of the same information as the credit scores used
to qualify you for a mortgage or credit card.
Just like a credit score, information from your credit reports is
summarized into what's called an insurance credit score. Insurance
companies use the insurance credit score to draw their own conclusions
about you. Regardless of these small differences, your credit score
is generally going to be a good indicator of your insurance score.
Each state has its own unique take on insurance scoring. Some states
allow insurance companies to use insurance scores to make a decision
to grant insurance coverage or not. Other states prohibit it. Still,
most states allow some version of a credit score to determine your
To a lot of people, allowing insurance companies to use credit information
For example, a bankrupt person with a stellar driving record could
see their insurance rates go up drastically just because the bankruptcy
appears on their credit reports and lowers their credit scores and
insurance credit scores.
So what's the difference between the scores lenders use and the
scores insurance companies use?
Insurance companies do not depend on scores to predict whether or
not you'll make your insurance payments on time (like a lender does).
They are more interested in whether or not you will be a profitable
And what makes you a profitable insurance customer? You're profitable
by paying your premiums and not filing any claims.
You can also be a profitable insurance customer by paying your premiums
and not filing any large dollar claims. And that's exactly what
they use insurance credit scores to predict.
Lender credit scores are designed to predict whether or not a late
payment incident will occur. Insurance credit scores are designed
to predict whether or not you will be a profitable customer.
Clear as mud, right?
The bottom line is that the insurance companies say they have been
able to prove, time and time again, that there is a strong statistical
relationship between your credit management and your likelihood
of filing insurance claims.
In addition, insurance companies claim to be able to show that consumers
who have lower insurance credit scores cost them more in claims
than consumers who have higher insurance credit scores.
What they haven't been able to prove is why there is a connection
between credit scores and increased incidences of claims. This is
where much of the controversy stems from.
Regardless, insurance companies have a right to use credit information
to evaluate your application for insurance. It's called a permissible
purpose and it's clearly spelled out in Section 604 of the Fair
Credit Reporting Act. It's the law.
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