Higher Insurance Premiums

You May Also Pay Higher Insurance Premiums

According to the Insurance Information Institute, "credit information has been used for decades to help underwriters decide whether to accept or reject applications for insurance." This information has lead the insurance industry to the development of an "insurance score" for individual homeowner and auto policies that is chiefly based on your credit history.

As it turns out, industry studies show that how one manages their finances directly correlates to how many insurance claims they will make in the future. In a study conducted by the Texas Department of Insurance shows that those with good credit are involved in 40% fewer auto accidents. These studies reveal that the worse your credit score is, the worse your insurance score (low numbers are better) will be, and the more likely you are to file a claim. This translates directly to higher premiums.

The insurance score is designed to predict the "loss ratio relativity" of a consumer. This means the amount of money the insurance company is likely to pay out in claims versus the amount they are likely to earn in premiums. Studies show that those with either no credit or bad credit have the propensity to incur a loss ratio high enough to prevent insurance companies from making a profit. In order to recoup these losses, premiums are raised—sometimes significantly.

It is important to note that the use of insurance scores varies widely from company to company and also comprises other factors: years of driving experience, driving record, home locations, etc. Fair Isaac has also developed a tool for insurance companies to calculate insurance scores, but many companies follow their own methods as well. A recent study cites more than 90% of auto insurance companies are currently using insurance scores when calculating premiums.

The insurance industry has adopted this scoring method in an attempt to keep overall consumer costs down. They claim that using this method prevents those with a low risk from paying the price for those at a higher risk. Some say that having a credit score of 650 or above can save you 15% or more on insurance premiums. While this is good news for those with good credit, a bad credit score can land you into the "bad insurance risk" category even if you've never filed a claim.

The good news is that if your credit score improves, you may be able to lower your hefty insurance premiums. Seeking the help of qualified credit repair professionals may help in this process.