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Credit Scores and Your Insurance Premium – Part 1

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Your credit score can have an impact on the premiums you pay for auto and homeowners insurance. As reported by GMAC Insurance, “According to a recent survey by Conning & Co., a Hartford, Connecticut based insurance research firm, 92% of all insurance companies use credit information when underwriting new policies.”

Some credit variables used in calculating an insurance score are outstanding debt, length of credit history, late payments, new applications for credit, types of credit used, pattern payments, available credit, public records and past due amounts. Insurers use credit scores differently than financial institutions. Insurers are looking more closely at how someone has managed credit over time rather than how much credit you’ve applied for recently as per Kimberly Lankford in her article in Kiplinger.

The reason for using credit history is that insurers have found a strong correlation between credit scores and insurance claims. People with high credit scores have been found to have fewer and less costly claims. While conversely, people with low credit scores and late payment history have had more claims.

The Insurance Information Institute says drivers at the bottom of the credit heap file 40% more claims than drives at the top of the pile.

Insurance scores help companies decide if you qualify for insurance and the initial rate they should charge you.

Elizabeth Mosley, of Illinois, says, “Insurance is based on risk, and research has shown that individuals who tend to not pay their bills on time – and then get low credit scores – file more claims, and that those claims are more expensive.”  When insurers get stuck with a bad risk, she adds, other policyholders end up footing the bill. “A lot of people benefit from it. Two-thirds of policyholders have lower premiums because of their good credit record.”

In Pennsylvania, companies may use your insurance score at the initial time your policy is underwritten and may use it at the time of renewal to decrease your premium. Insurance scores cannot be used to increase your insurance premium at the time of renewal.

Next week’s blog will discuss how to find out what your credit rating is and how you can improve your rating.

  • “How credit scores affect insurance rates” by Christopher Cruise
  • “How Does Credit History Affect My Auto Insurance Quote?” www.gmacinsurance.com
  • “Know the Score” by Kimberly Lankford
  • “How Does Your Credit Score Affect Your Auto Insurance Rate” www.carsdirect.com

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