This practice raises the question: Is a person’s credit history a valid basis for determining whether or not the policy holder will file a claim?
Validate the Credit Source
One would think that in order to use credit reports as a basis for determining a person’s insurance rate, the credit report should be free from error. After all, a person’s annual insurance premiums among other things are depending on it. Unfortunately, that is not always the case.
All too often there are errors on credit reports. Many times the consumer doesn’t even know she has an error on her report until she is denied credit or unable to secure insurance. In 2004 US Public Interest Research Group (PIRGs) conducted a survey on the subject of credit reporting errors. Of those surveyed, 79% responded that there were errors on their credit report. Of those with errors, 25% indicated that the errors were serious enough to negatively affect their ability to secure credit.
In addition to credit reporting errors, illegal actions such as identity theft can negatively affect one’s credit. Add to the mix economic conditions that are out of the consumer’s control such as the mortgage crisis, rising unemployment, inflation, increase in home foreclosures and the rising cost of goods and services, struggling consumers find their credit scores dropping which also has a negative impact on their insurance rates.
Insurance Rating and Extenuating Circumstances
The young (who have not yet established a credit profile), the old (who don’t use credit so readily) and individuals who opt to live the debt free life can conceivably be penalized with higher insurance premiums for not having credit or not having enough credit. Additionally, newly divorced, widowed or individuals undergoing a medical emergencies may undergo a severe shift in their credit rating which can negatively affect their chances of getting a low insurance rate.
Is Using a Credit Report as a Factor in Determining Insurance Rates Valid?
According to a report, Credit-Based Insurance Scores: Impacts on Consumers of Automobile Insurance compiled by the Federal Trade Commission, purportedly individuals with a lower credit score are more likely to file automobile claims than policyholders with high credit scores. According to the Property Casualty Insurers Association of America (PCI) insurance scores is an accurate insurance rating tool. In a July 20, 2007 release they confirm their opinion by stating , “In fact, insurance scores were found to be a better predictor of claims than driving records.”
How to Combat High Insurance Rates because of Poor Credit
Whether it seems fair or not, insurance companies use credit when rating policies. Therefore, consumers looking to purchase insurance should make getting a copy of their credit report the first step in the insurance buying process. After receiving the credit report, review it and correct any errors found. In the meanwhile, take the necessary steps to make positive credit score changes.
Credit Scores and Insurance
A credit score can significantly impact the ability to get insurance and it can also impact the cost of insurance. A credit score is a measurement of credit history in numeric form. Insurance companies use credit scores to help determine eligibility for an insurance policy, the types of coverage available and also to decide how much customers will pay for insurance premiums. Insurance companies do not need applicants’ permission to run a credit report.
How Credit Scores Impact Insurance Premiums
Insurance companies have years of studies that show people with problem credit are more likely to file insurance claims. According to the logic used by many insurance companies, people who are likely to file claims should pay more for insurance, get reduced insurance coverage or be denied for insurance. What to know about a credit score when applying for insurance or trying to reduce an insurance premium:
Based on the national average credit score, a score of 700 or higher is a very good to excellent credit score. Te ability to get insurance and to get the best prices on insurance will not be negatively impacted by a credit history in this range.
A credit score that falls between 650 and 700 is considered to be very good credit. The national average credit score in the U.S. is 692. People in this range should meet insurance companies’ financial criterion and insurance premiums shouldn’t be impacted by the credit report and score.
Credit scores that fall between 600 and 650 are still considered “fair,” based on the national average credit score. Though no one knows exactly how each company uses a credit report and score, this credit range probably won’t impact insurance rates or the ability to obtain insurance.
If a credit score is less than 600, there may be a problem either obtaining insurance or getting a competitive rate for insurance premiums due to credit history.
What to Do to Improve a Credit Score
There are things that can be done to improve a credit score. Get these items cleaned up and removed from a credit history and there will be a greater likelihood of getting affordable insurance premiums:
If there are any collections agency reports on a credit report and score, find out if these can be settled with the collections agency for a lesser amount. The collections agency must state in writing that they will remove the negative item from a credit history once they receive payment.
A credit score is negatively impacted by late payments, multiple open lines of credit or advancing past credit limits often. Work to pay more than the minimum amount due on credit cards, close credit cards that aren’t needed and stay within limits when using credit cards. All of these things can help improve a credit score and the premiums paid for insurance.
If there is a mistake on a credit report and score, immediately contact the appropriate parties to dispute the issue. Once the item has been removed from the credit report, contact the insurance company to let them know the problem has been resolved. Credit reports and credit scores are updated frequently, so insurance companies can see changes right away.
A credit score can greatly impact the ability to get insurance or the cost of insurance premiums. And if the insurance company runs a credit report upon policy renewal, they may decide to non-renew an insurance policy or raise rates if the credit score hasn’t improved.