It is now common knowledge that insurers look at your credit history while determining premiums charged in nearly all states, except California, Hawaii and Massachusetts. However, insurance score takes it a little further than just looking at your financial activities. It usually takes your claim, accident and driving history into account as well.
The way scores are calculated can be slightly different depending on which personal lines insurance product it is used for. For example, different information may be used when calculating home insurance costs than when preparing automobile insurance quotes.
Anyway, the way insurers use credit reports a bit different than how banks and credit agencies use. Carriers try to predict the risk of getting a claim from you and banks try to predict risk of default on a loan or mortgage. Having a good financial past helps you to get both cheap auto insurance and low mortgage rates.
Lately, insurance companies have been looking into many factors that can help them predict future claims. If there is a correlation between a data and claims they like to use it. When they determine their scoring tables they look at the demographics. For example, they look at how many people with one claim made another claim shortly after. They look at the driving experience and age too and see how it correlates with claims. That is why it is often referred to as insurance risk score.
There are independent companies who calculate insurance scores and provide credit scores. However, most insurers would rely on their own formulas to assess the risks after checking your credit, claims and driving history through various sources.
Mostly, the higher your insurance score is the better for you. Oddly enough, it may be the opposite for some insurers. In any case, you wouldn’t know what score a particular insurer has given you. But it isn’t hard to guess by looking at the quote they offer. If they offer a good price that means they think you are a low risk driver, after taking everything into account.
Most companies allocate different weights on information they gather. While one company heavily relies on past accidents a few carriers are known to place more weight of financial position of their applicants. That is why you may still be able to get good car insurance rates even if you have a recent claim providing you have good credit score, own your home and live in a lower risk zip code. Even each component of your credit report may be taken into account differently depending on the insurer. That is why it is smart to get several quotes before choosing your provider.
As you know, having good driving record and no recent claims help you a lot to get low rates. In addition, long established financial history, no missed payments, having several accounts in good standing and low use of available credit can help you too. On the other hand, any action taken against you by debt collection agencies, late bill payments, maxing out your credit cards are bad and things like bankruptcy can ruin your chances of finding affordable vehicle insurance.
Your financial background may have something to do with it if you are wondering why your rates are high. There are things you could do now if you are facing higher rates due to bad credit. For example, you could start looking at non-standard insurers who are more tolerant than the mainstream insurers. Shopping around for the best deals is another one. In the long run, you could try to improve your credit score and improve your premiums in the process.