Insurance companies use a risk based method called insurance scoring to determine whether to grant, renew and price your auto and homeowner insurance.
Do those words sound familiar? They should, since almost the same language is used by lenders using your credit score to determine whether to grant, renew and price your credit cards and other loans.
How do they score insurance, you ask?
Your credit score is used as a risk indicator, along with your claims history and your driving record. This means that although you may have a clean driving record and no property claims, if your credit score is less than desirable, you will pay higher premiums.
What does my credit score have to do with my ability to drive?
The Federal Trade Commission (FTC) released its study, “Credit Based Insurance Scores: Impact on Consumers of Automobile Insurance” in July, 2007. Among its findings, “credit based insurance scores are predictive of the number of claims consumers filed and the total cost of claims.” Translation: Good credit scores indicate good drivers who file fewer claims; poor credit scores indicate poor drivers who file more claims. The FTC study also found that insurance scoring makes the insurance process “quicker and cheaper” allowing the savings to be passed on to lower risk consumers in the form of lower premiums.
So, what can I do about it?
This information can be used to take action to attain cheaper insurance premiums. Get in the habit of checking your credit report regularly. It is estimated that 70% of credit reports contain errors, some serious enough to affect your ability to obtain credit, the interest rates you may be entitled to, or the insurance premiums you deserve.
Since the Fair and Accurate Credit Act (FACT) was passed in 2004, you are entitled to one free credit report from each of the three major credit reporting agencies, annually. Go online, www.annualcreditreport.com or call 1-877-322-8228 to request your copies. You will want to check the accuracy of each account, errors in reporting and incidentally, for any account that you did not authorize, which may signal identity theft.
If you need help understanding your credit report, Lutheran Social Services Consumer Credit Counseling Service offers Credit Report Consultations. Call 888-258-2227 or click here to schedule an appointment to meet with a certified credit counselor to better understand what it all means.Together we can make a difference. Make a financial gift to LSS today.