Why credit scores affect insurance rates
To protect their credit a customer froze their credit accounts. While this step did protect their credit by preventing anyone from opening a line of credit in their name, they were also concerned how it would affect their insurance rates. Great question because in Pennsylvania credit score is allowed to be used to develop an insurance score.
A credit report is specific information relating to a consumer’s use of credit. It contains things like where you live, how your bills are paid, the amount of your outstanding debt, the length of your credit history and whether there have been any legal actions such as financial judgments, tax liens or bankruptcy fillings.
A credit score is a number based on your credit history that ranks your credit worthiness. The factors in your credit report are multiplied and divided many ways to result in your credit score.
When an insurance company writes your home or auto insurance, they gather information about you and assign you an insurance score. Companies find insurance scores to be a good measure of your likelihood for filing property or casualty insurance claims. They are not the same as your credit score, but they are similar.
Insurance scores are made up of many data points. Credit score is just one of them.
Every insurance company has a secret formula to determine insurance scores. The reason the formula is secret is because of the competitiveness of the industry. The company that can best price a policy to the risk will not only be profitable but will be able to provide the lowest cost to the best risk. The more data points a company uses, the odds are the more accurate the price to risk ratio.
Each insurance company uses the factors of your credit report differently, so it’s important to shop around for the best price for your policy. Also, if your insurance company agent tells you that you have not qualified for their best rate because of your credit score, ask what that means exactly.
Remember a company that uses only a credit score in their formula may not be giving you the proper rate.
In Pennsylvania, companies may use your insurance score at the initial time your policy is underwritten and may use it at the time of renewal to decrease your premium. Insurance scores cannot be used to increase your insurance premium at the time of renewal.
A good way to keep tabs on your credit information is to review your credit report from all three credit bureaus. Dispute anything that you find incorrect – there is no penalty for disputing incorrect information! There are three different credit bureaus.
Some creditors report to only one bureau, while others may report to more than one.
To make sure your reports stay correct, you may consider ordering one free credit report every four months and alternate your requests from each company. You can now obtain your credit report free of charge.
You can contact credit bureaus individually, or you can get a report from all three at once through the website: www.annualcreditreport.com.
Bob Hollick is a State Farm Insurance agent based in Washington. His column appears every other Friday in the Observer-Reporter.