Credit score, Insurance Score and the cost of Car Insurance

While shopping for Auto Insurance an individual must try to reduce the cost of auto insurance. In that case a good credit score may help to lower the cost. Credit score is a statistical method of evaluating an applicant's credit worthiness. Companies are always trying to pool that part of the consumers which will provide the maximum profit and so they try to correlate rates for insurance policies as closely as possible with the actual cost of claims. It has been found that almost all auto insurers use the credit information to decide whether to issue a policy or even they set the premium level on the basis of that score.

The companies generally do not look at the actual credit report. In fact they receive the credit score from any of the three major national credit depositories, Equifax, Experian and TransUnion. Now the insurance score is based on the FICO score. It is a credit score developed by Fair Isaac & Co. Credit scoring is a method to determine the likelihood that credit users will pay their bills.

Credit score analyze a borrower's credit history considering numerous factors such as:

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• Late payments
  
• The amount of time credit has been established
  
• The amount of credit used versus the amount of credit available
  
• Employment history
  
• Length of time at present residence
  
• Negative credit information such as bankruptcies, charge-offs, collections, etc
  

One can raise the FICO score over a period of time through the following ways:

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• Pay your bills on time. Late payments and collections can have a serious impact on your score.
  
• Reduce your credit-card balances. If you are "maxed" out on your credit cards, this will affect your credit score negatively.
  
• If you have limited credit, obtain additional credit. Not having sufficient credit can negatively impact your score.
  
• Do not apply for credit frequently. Having a large number of inquiries on your credit report can worsen your score.

There is another concept called Insurance Score which also plays a role to determine the cost of insurance. It helps to determine the amount of premium to be charged. An insurance score is a numerical ranking based on a person's credit history. It predicts the average claim behavior of a group of people with essentially the same credit history. Typically a good score is assumed to be above 760 and a bad score is below 600. People with low insurance scores tend to file more claims. But there are exceptions. As there are teenager drivers who have never had a crash although teenagers as a group have more accidents than people in other age groups. Insurance scores do not include data on race or income because companies do not collect this information for insurance. Insurance score is not much concerned with the propensity to take a new credit. Instead it focuses on the issue of stability.

Studies have shown that how a person constructs his financial planning, which is what an insurance score argues, is a good predictor of insurance claims. It is accepted that people who manage their finances well tend to also manage other important aspects of their lives, such as driving a car. The factors such as geographical area, previous crashes, age and gender, insurance scores collectively enable auto insurers to price more accurately, so that people less likely to file a claim pay less for their insurance than people who are more likely to file a claim. Insurance scores are useful to the insurer to differentiate between lower and higher insurance risks people and thus to charge a respective premium.

There exists some sort of debate regarding the use of insurance credit scoring. Insurance companies claim that the use of these scores helps them to issue new and renewal insurance policies based on objective, accurate, and consistent information, better anticipate claims and better control risk. This enables them to offer more insurance coverage to more consumers at a fairer cost.

Opponents of insurance credit score argue that companies can use insurance credit scores to non-renew coverage regardless of whether a claim has been filed or premiums have been paid on time and that credit scoring focuses on a consumer's economic status. People with poor credit scores sometimes pay 4 to 5 times as much as the other consumer.

One aspect of insurance score is to remember. While it is easy to get the credit score, it's almost impossible to get the insurance score. As there is no hard and fast rule on the part of companies to hand it over and most companies don't.