Simply put, smart credit practices can help your insurance rate.
The purpose of credit scores used in lending indicates the probability of someone becoming 90 days late on any credit obligation within 24 months.
Insurance companies use credit-based insurance scores to help predict whether you’re likely to file an insurance claim. This helps insurance companies determine what the loss ratio of a customer will be. The loss ratio is how much the amount of a claim (or claims) filed exceeds the amount of premium collected.
Similar factors that make up your credit score also help to determine your credit-based insurance score, such as:
- Making on-time payments and avoiding collections and defaults.
- Maintaining lower balances on credit cards.
- Having a well-established credit history.
- Minimizing the number of credit applications for new credit.
Your credit history cannot be used as a sole factor in determining your rate or whether you are insurable. In some states, such as California, Hawaii, Massachusetts, and Michigan, using credit to determine rates is strictly limited or prohibited.
It’s also important to note that insurance companies don’t consistently check your credit. Typically, an insurance company will check your credit when they receive the application or just before a policy is issued. This check is considered a “soft pull” on your credit report and will not affect your credit score.
Improved your credit?
Let’s say you paid off a high-balance credit card, paid off a loan, or went two or more years without a missed payment, and your credit score went up significantly. You could contact your insurance company or an Adams Insurance Advisors agent and request a re-score. A re-score will pull your credit report to see if your improved credit history will have any bearing on your insurance premium. Keep in mind, re-scores should only be requested if there has been a significant, positive change to your credit report.
Other factors that determine your insurance premium.
Your credit history is only a small part of what goes into determining your insurance rate. Other factors that influence your premium include:
- Type of insurance you’d like to purchase.
- Geographic location.
- Demographics (e.g. gender, age, marital status, etc.)
- Type and age of the vehicle you drive.
- Your home’s age and value.
- The number of claims filed in the past.
- The deductible on your insurance policy.
If you’ve ever filed an auto or homeowner’s insurance claim in the past seven years, that information is stored in the Comprehensive Loss Underwriting Exchange database (C.L.U.E.). Since C.L.U.E. reports are legally considered a consumer report by the Fair Credit Reporting Act, you can obtain a free copy of your auto and homeowner’s C.L.U.E. report once every 12 months through LexisNexis Solutions. Only claims filed in the past seven years will appear on the report.
In addition to accessing your C.L.U.E. report every 12 months, you have access to a free, annual credit report from each of the three major credit bureaus:
If you’re working to improve your credit, it’s good practice to pull a credit report from one credit bureau, then another report from a different credit bureau four months later, and so on. You can obtain a credit report from each credit bureau or access all three at AnnualCreditReport.com or MyFICO.com.
If you have any questions regarding your insurance policies and premiums, contact Adams Insurance Advisors today!