You may not be aware of the fact that many insurance companies consider your credit score when calculating your insurance premium. Thus, if you have a lower credit score, you may end up paying more for your insurance premium than if you have a higher credit score. It doesn’t matter if you’ve never filed an insurance claim or if you are a long standing customer with the insurance company.
Insurance companies state that there is a correlation between a person’s credit history and the likelihood of that person filing an insurance claim. In essence, the reasoning is that a person who reliably pays his or her credit card bills and loans is also more likely to be a reliable (i.e., careful) driver, homeowner, etc. Reliable customers are considered less likely to file an insurance claim and therefore cost the insurance company less money.
According to the Insurance Information Institute (III), insurance companies use a different credit score to calculate insurance risk than banks or lending institutions. Insurance companies use an insurance credit score that incorporates your state as well as your credit score to calculate an insurance risk score. It is your risk score that determines how much you pay for your insurance premium.
Should your insurance company quote you a higher coverage rate based on information retrieved from your insurance credit score, it is required to notify you of this fact and include the reason for the higher premium. You are also entitled to a free copy of the credit report used to calculate your risk. Consumer notification and rate explanation are required under the Fair Credit Reporting Act. You may also purchase your insurance credit score report from TrueCredit.com, which is a subsidiary of TransUnion (one of the major credit reporting agencies).
The use of credit score to determine insurance risk and premiums has drawn criticism. Many individuals argue that consumers often attain a lower credit rating through events outside of their control, such as a divorce, layoff or medical emergency. Many individuals who have not achieved a significant credit history, such as college students and young adults, are also unfairly penalized. Insurance risk scores are also coming under increased scrutiny because insurance companies do not divulge the exact formulae used to calculate them.
Currently, you can help lower your insurance premium by obtaining your credit report from a major credit reporting agency, such as TransUnion, and checking it for any errors. If an error is located, you should contact the reporting agency. Provide documentation that illustrates how the reported information is erroneous. More information can be obtained via the FTC’s How to Dispute Credit Report Errors web site.