Insurance credit scoring mirrors consumer credit scoring. It is an actual number the insurance industry uses to determine a consumer’s premium or whether or not they will even issue a consumer a policy. Insurance credit scoring is also called credit-based underwriting, credit-based insurance scoring, an insurance score, a company placement indicator, or an insurance financial stability score.
Regardless of what your company calls this score, insurance companies are permitted to delve into your credit file under both federal and state laws. They use certain factors to determine your premium.
For example, bankruptcies, collection activity, foreclosures, tax liens and other publicly available information along with payment frequency, total number of credit lines and outstanding credit balances are used in computing an insurance credit score. To complicate the picture, each company is allowed to choose what they believe is a good score.
That means one company may believe you have a great score while another company would look at your score under a different perspective. The second company would probably charge you a higher premium.
However, not all is bleak in the world of insurance credit scoring. Insurance companies are prohibited from using the number of credit inquiries in your credit file, total amount of available credit you are not using, insufficient credit history, debt associated with buying a new vehicle of home, and the types of credit and debit cards you have in calculating your insurance score.
This type of information is just one of several factors used by insurance companies to determine policy premiums. For example, both auto and homeowners insurance premiums are based on the cost to replace your car or home, where the car or home is located by zip code and the extent of your coverage.
By extension this means if you decide to increase your liability insurance, the cost of that particular insurance policy will increase. You can cost yourself more money by increasing your limits. Therefore, you should not only ask how your insurance credit score influenced the premium but how the amount of coverage you want will increase the premium.