We’re all aware that our credit score is used to determine the spending limit on our credit cards or interest rates on loans. Our creditworthiness is used by lenders to gauge our ability to pay back loans and the amount of money we have to do so.
On the contrary, insurers don’t care how much money you have in the bank–they just want to know how you’ve used your credit in the past and how it’s influenced the way you pay bills, loans and other debts.
Because insurers use credit differently than traditional lenders, they’ve come up with a score all their own: the insurance score.
Formulating an Insurance Score
How do insurers formulate an insurance score? Fair Isaac, a financial management solutions company, provides insurers with a formula with which to calculate your insurance score. And while that formula does involve your actual credit score, your insurance score is calculated in a way which quantifies how you’ve used credit in the past.
The good news for consumers is that because of this formula, no one item can prevent you from receiving a good auto insurance rate. But what is of concern to car insurance shoppers is that insurance rates can vary from insurer to insurer.
For the most part, insurers are allowed to come up with their own scoring models. This is also good news for consumers–your insurance score might be better with XYZ Company rather than ABC Company. This further highlights the importance of shopping around for the best auto insurance rate.
Elements of an Insurance Score
So how do you know what components are incorporated into your insurance score?
According to Fair Isaac, the following factors are used to determine an insurance score:
- Payment history
- Length of credit history
- Amount owed on revolving accounts
- Delinquent items and collections
- Amount owed for delinquent items
- Time passed since last delinquency or late payment
- Total amount of outstanding debts
Fair Isaac does not consider the following:
- Race, age, sex, marital status, religion or country of origin
- Employment history, job title or salary information
- Child support agreements
- Rental obligations
- Whether you have or are participating in credit counseling
- Where you live
If you’re curious about your insurance score, direct all questions to your insurer. While they may not disclose your actual score, they should be able to answer any and all questions related to credit-based scoring.
Cleaning Up Credit
While some states are questioning the insurance industry’s right to use credit information in determining auto rates, 92 percent of the nation’s 100 largest auto insurers are currently using credit to develop insurance scores–and folks with bad credit are paying anywhere from 20 percent to 50 percent more than drivers with good credit.
Obtain the best possible insurance score and:
Look over your credit report. Most states entitle you to at least one free credit report each year. Get a copy of your credit report and check for any errors that may hinder your ability to obtain a good insurance score.
Pay on time, all the time. Automatic withdrawals and online banking are making it easier for consumers to make timely payments. If you have a hard time remembering what bills are due and when, online bill pay is probably a good move to make!
Pay down large balances. If you have large outstanding balances or revolving debt, work on paying those balances off as soon as you can. Revolving debt has negative affect on your credit score–especially if you owe large amounts of money.