Well, there’s good news and not so good news when it comes to the relationship between your credit score and your insurance.
Despite all dire predictions to the contrary, credit scores have held steady during the recession. In some cases, they’ve even improved. Why? Consumers’ habits have improved. People are getting their bills paid on time, whittling down debt, and avoiding risky expenditures.
The not-so-good news is that although credit-based insurance scores have been used by the industry in a variety of ways for more than 20 years, the practice is on the rise. Insurers believe that a person’s credit score is a likely indicator of their chances of filing a claim that will cost the company money.
What does “on the rise” mean? FICO estimates that 95 percent of auto insurance today is awarded based on a credit-based insurance score, with about 90 percent of homeowners policies being approved the same way.
The problem is that the industry does not have a standard model in which to plug the data. About 100 factors are used to arrive at a credit score; about 20-30 for an insurance score. But most companies develop their own combinations and metrics.
Critics say that this situation unfairly penalizes low-risk policy holders who have credit issues — an all to likely outgrowth of hard financial times. A story for Fox News cited the tale of one gentleman who pays for everything in cash and was hit with higher insurance premiums for having a neutral credit score.
Obviously this is not a practice that is going to go away. Making late payments or carrying a bad debt may now take on greater significance than just late fees. Of course, the flip side is that consumers have an even greater incentive for keeping a good credit rating.
Bear in mind, however, that credit reports are often in error. It looks as if availing yourself of free credit reports and clearing up any mistakes should now be a standard part of your annual insurance review. Otherwise, you could be paying more for your coverage than is fair. Make sure you’re getting credit for your credit.