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Inside this Article
Car Insurance and Your
Credit Report
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Before getting new
insurance, it is a good idea to find out exactly
where you stand as far as your credit is
concerned, in order to secure the type of coverage
that is right and reasonably priced.
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Insurance companies use
several factors to determine your premiums, including
your driving record, age, the type of car you drive,
marital status, and your address.
But increasingly,
companies are using your credit history as an
indicator of how likely you are to file a claim.
Called an insurance risk score, this controversial
number is calculated using a special formula similar
to a credit score but developed specifically for
insurers. This formula is currently unavailable to
consumers; however, many states are currently
considering legislation to regulate the use of this
score. In fact, Maryland and Washington have passed
laws that restrict the use of credit information by
insurance companies. A few things have been made
public about your insurance risk score recently.
What is the
insurance credit score?
Insurers
use a credit score, based on information contained in
your credit repost, to assess the likelihood that you
will file an insurance claim in the future.
Auto insurance companies use this information in part
to establish rates.
It may not seem fair, but insurers base several
assumptions on your past repayment history. Because
these are not factual assumption (whether or not you
paid your Visa last month isn't going to make you
crash next week) insurers instead use a scoring model
to determine the likelihood of a claim.
Under such a scoring model, based on historical data
or all drivers, insurance companies try to guess
whether or not someone who didn't pay their Visa will
in fact crash next week. Apparently it works for them.
The above is a gross over simplification of the
process, but the principle holds.
You should know that there are movements in
many states that seek to disallow these types of
practices. However, until then, you are better off
being informed about your credit situation.
How your credit
score is determined.
Using
statistical programs, all your credit information is
compared to the performance of consumers with profiles
similar to yours.
A credit scoring system awards or subtracts points for
various factors or variables in the credit report to
determine the score. The following information is
considered:
• your personal payment history
• the amount of money you owe now
• the length of your credit history
• whether you have any new credit or
debt
• the mix of credit types you use
The score predicts the likelihood of certain events
occurring. (Like an insurance claim.)
Although this may strike many as being somewhat unfair
(ourselves included) it is the way that insurance
companies work, and there isn't much that can be done
about it. Being informed is the only recourse
consumers have.
The best way to review your credit is to order
a three-in-one credit report.
This will allow you to see the report that is on file
in your name at each of the three credit
reporting agencies (Equifax, Experian and TransUnion).
In addition, you will be given a credit score
based on the information in each report. These scores
will be accompanied by written explanations, detailing
the information used to compute each particular score.
We now know that five
main financial factors are evaluated to calculate your
insurance risk score:
1. Your payment
history: Your record of paying credit bills in the
past, number of adverse public records (i.e.
bankruptcy, collections, liens), and the amount of
delinquencies on your credit record account for about
35% of your insurance risk score. This is the largest
factor in your insurance rating.
2. Amount of debt you
owe: The number of accounts you have open, the types
of accounts, and the amount you have charged all
combine to count as 30% of your risk score.
3. Length of credit
history: The amount of time that you've had credit and
the specific length of time that you have had certain
accounts make up 15% of your risk analysis.
4. New credit: 10% of
your risk analysis is calculated based on your recent
credit activity. Your number of new accounts, recent
inquiries, and efforts to re-establish troubled credit
are grouped into this category.
5. Types of credit in
use: The number and activity of credit accounts
including credit cards, retail store accounts, and
mortgages count for another 10% of your risk
evaluation.
Although consumers
can't access their own insurance risk score, simply
knowing that your credit history is used by insurers
can help you get a better deal. If you have excellent
credit, you may want to use it to your advantage and
shop around for the best insurance rates possible. If
you have troubled credit, you may want to stay with
your current insurer until your finances improve.
By understanding some
of the credit factors that go into your insurance
assessment, you are empowered to improve your
insurance risk score. Take charge of your credit and
get the insurance rate you deserve.
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