Your credit score will have a direct impact not only on your ability to obtain car insurance but also on the amount of your monthly premium. Nowadays, most insurance companies are using a numerical formula called an insurance credit score. This score is calculated using a set formula that takes your credit score and other factors, shakes them up and shoots out an insurance score.
According to a variety of actuarial studies, this insurance score is a reflection of how likely you are to be involved in an accident. Your insurance premiums are then set accordingly. The higher your insurance credit score, the lower your insurance premiums, and vice-versa. This formula is very similar to the formula used by banks when processing loans or credit card applications.
Why The New Policy?
Insurance companies, as with all companies that live score profit from risk taking ventures, must try to manage that risk to the best of their ability. They have sought and found a reliable method of assessing a driver’s potential for filing claims. A study conducted by an actuarial consulting firm found that there is a 99% correlation between insurance credit scores and insurance claims filed. Utilizing insurance credit scores to make coverage and rate premium decisions, assists insurance companies in setting rates as close as possible to the amount of risk that they incur by insuring any particular driver.
Also, it is a fact that MVR reports are notorious for omitting driving citations/tickets that were resolved favorably in court. Therefore, they are not accurate representations of a person’s driving record. The insurance credit score is now the indicator of a persons’ claim filing potential.
How Is The Insurance Score Calculated?
Your insurance credit score is calculated using a formula similar to that utilized by banks when they extend credit. Insurance scores are developed by the Fair Isaacs Company. They use between fifteen and thirty different credit characteristics. Each characteristic is assigned a different weight. This calculation assigns each file a score between 100-999, the lower the score, the greater the risk. Usually credit activity in prior twelve months is given the most weight.
Integral portions of the fifteen to thirty characteristics are your payment history, debts, length of credit history, new accounts, and balance of accounts as reflected on your credit report. It is illegal to use personal data, such as a person’s ethnic group, religion, gender, family or marital status, handicaps, nationality, age, address or income when calculating their insurance credit score.
What If I Have An Excellent Driving Record But A Few Late Payments On Credit Accounts, Will I Pay Higher Premiums?
The not so pleasant answer to this question is yes. If you’ve never been in a car accident, yet have a blemished credit record, it is highly likely that your insurance premiums will be higher than a driver that has a blemished driving record, yet has excellent credit. This is because underwriters feel that your credit score is an indicator of your fiscal responsibility, and that if you are fiscally responsible you are a more responsible driver. Responsible driver’s are lower risks and file fewer claims, costing insurance companies less money, and are therefore rewarded with lower premiums.