How an Insurance Score Is Calculated and How to Find Out What Yours Is
An insurance score is a calculation used to help rate the risk of insuring a specific individual. Fair Isaac, also the provider of FICO credit scores, and ChoicePoint, owned by LexisNexis, are the most well-known compilers of insurance scores. Fair Isaac scores range from 300 to 900 and ChoicePoint scores range from 300 to 997. Similar to a credit score, it is calculated by examining factors such as credit history, credit performance, debt level and frequency of attempts to receive new credit. Also like a credit score, a higher insurance score indicates a lower risk individual. These scores are examined along with driving history and insurance history to determine whether or not the insurer will offer coverage to a particular person, and if so what their premium will be.
Some people may wonder why credit history matters when it comes to auto insurance, because it has nothing to do with how good a driver you are. However, statistics indicate that individuals with higher credit/insurance scores generally file fewer claims. They are also less likely to miss a payment or let their coverage lapse. Therefore, it should be no surprise that insurance companies take these scores very seriously when calculating premiums. As previously mentioned, driving record and insurance history also play a significant role; someone with a high insurance score may have to pay a high premium if their history includes numerous accidents or multiple claims filed. On the other hand, someone who has a lower insurance score may still get a reasonable premium, due to a clean driving record and claim history.
A high insurance score can be achieved the same way that a high credit score can be achieved. The key to both is the prolonged and responsible use of credit. Making bill, loan and credit card payments on time is extremely important. To obtain a strong score, you likely need to have credit card balances open to show that you can handle the responsibilities that come along with having credit extended to you. Keeping your overall credit utilization at a level of no more than 35% (and preferably lower) is wise. Anything higher may hurt your scores. However, keep in mind that attempting to open a new credit card account in order to receive more overall credit and therefore reduce your utilization rate will likely hurt your score rather than help it, so avoid doing so. Opening and closing credit accounts frequently can also damage your score.
To reiterate, maintaining several credit card accounts, keeping your revolving balances at a reasonable level and paying all your bills on time is the best way to earn strong insurance and credit scores. If your score is lower than you would like it to be, doing the same things can improve it substantially. If you follow these steps and prove that you are a responsible driver, you should be able to keep your auto insurance premiums relatively low.
In addition to the insurance company's in-house operations, the 3 major credit reporting companies are getting into the insurance score business as well. Equifax, TransUnion and Experian all developed insurance score services based on the FICO model and some of these companies offer insurance score reports for consumers. You can get a copy of their insurance scores once a year for $12.95 by going to the Web site ChoiceTrust.com. TransUnion offers consumer's insurance score reports for consumers as well. Go to the TransUnion page truecredit.com/insurance to find out more. You can also ask your insurance agent for insurance score information.
Consumers need to bear in mind that credit scores have an impact on insurance scores. Knowing your credit score can help you figure out what's going on with your insurance score. If you have never had an insurance claim, and your insurance score is still low, it is likely due to your credit score. You can get a copy of your credit report from a number of sources including annualcreditreport.com, creditreport.com, freecreditreport.com and from the credit reporting agencies Experian, TransUnion and Equifax.