Credit scores should never be dinner party discussions. The reality is that each individual has varying credit scores based on numerous factors in their personal financial history. A low, or “bad”, credit score can haunt us like a ghost—never leaving our side and scaring away mortgage brokers, insurance companies, and sometimes even employment opportunities.
Credit-based insurance scores are often a reliable predictor of the accumulated risk under a car insurance policy. This means that clients with higher-risk credit scores will end up paying higher premiums. In majority of states across the U.S, insurance companies use a credit-based insurance score rather than a regular credit score to weigh the risk of insuring a client. With that being said, this is yet another reason why you should keep up with payments and limit borrowed credit. At Bickle, we want to always advise our clients on the best practices to keep their insurance premiums low. Keeping up with finances and avoiding debt accumulation are both viable ways to lower your credit-based insurance scores.
Now let’s chat about what exactly is considered in a credit-based insurance score. There are several different organizations that generate credit-based insurance score reports for insurance companies to use in their decision-making process. For example, FICO generates credit-based reports through considering five determining factors. Each factor is weighted differently in composing the credit-based insurance score.
About 40% of the score is your payment history, meaning, the rate at which you make payments on outstanding debts. Another 30% of the score is your outstanding debt, the score considers how much debt you currently are in. A smaller portion of the score, about 15%, is your credit history length—how long you have had a line of credit. The score also considers the rate at which you have applied for new lines of credits, this only makes up about 10% of the score. The final consideration, making up 5%, is the types of credit you have—whether it’s an auto loan, credit cards, or a mortgage.
With all of these contributing factors to generating a credit-based insurance score, it is important to consider that personal information is not observed. The score does not consider:
-Race, color, national origin
-Income or employment history
-Whether a consumer is participating in credit counseling
Now that you understand what your credit-based insurance score is composed of, it’s important to know how to check your score. The FACT Act permits individuals to obtain a free credit report annually. The complimentary credit report can be obtained from Experian, Equifax, or TransUnion. Individuals can also check all three reports one a year by visiting www.annualcreditreport.com. It’s important to be cognizant of your score and how it could be affecting your insurance premiums.