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How to save money by improving your Insurance Score

For many people, the formula used to determine insurance rates may look like a mythical magic 8-ball type of voodoo. But in fact, there are highly-evolved formulas that help insurance companies identify the risks they are taking on when issuing your insurance.

You may have an identical driving score, the same number of tickets, driving experience, etc. as someone else, but a wholly different insurance score. That score determines how low or high your insurance premiums will be.

What is an Insurance Score?

Before you can understand how it affects your premium, you first need to know what is an insurance score is and how it’s determined. The truth is that it varies from one insurance company to the next. Each company has its own formula for determining your insurance score and how much weight individual components will carry in the formula.

Some of the factors that could impact your score include things like:

  • Credit Score
  • Collections
  • Length of Credit History
  • History of Late Payments
  • Outstanding Debt
  • Driving Record
  • Type of Employment
  • Miles Driven on Average Week
  • Value of Vehicle
  • History of Insurance Claims

What insurance companies are really interested in when it comes to determining your insurance score is how likely you are to file a claim. The less likely their formula determines you will be to have an accident or file a claim, the lower your premiums will be.

There are also factors, according to the National Association of Insurance Commissioners, that cannot be used in determining your insurance score. These include:

  • Race, color, national origin
  • Religion
  • Gender
  • Marital status
  • Age
  • Income, occupation or employment history
  • Location of residence
  • Any interest rate being charged
  • Child/family support obligations or rental agreements
  • Certain types of inquiries of your credit report like account review inquiries, employment inquiries, promotional inquiries from credit companies, etc.
  • Whether or not a consumer is participating in credit counseling of any kind
  • Any information not found in the credit report

It should be noted that this is the case for insurance companies operating in the state of Florida. Other states may have different policies and laws regarding what can and cannot be used in determining your insurance score.

What is a Credit-Based Insurance Score?

A credit score is a snapshot of your credit at one point in time. Credit-based insurance scores were introduced in the early 1990s and use certain elements of a person’s credit history to predict how likely consumer is to have an insurance loss, as research shows there is a correlation between credit characteristics (credit-based insurance scores) and insurance losses. According to FICO, a major company that generates credit-based insurance scores, approximately 95% of auto insurers and 85% of homeowners insurers use credit-based insurance scores in states where it is a legally allowed underwriting or risk classification factor.

How can an insurance company use your credit-based insurance scores?

An insurance company can only use your credit-based insurance score as one factor in its underwriting process. It will be considered with several other factors that vary by insurance type. For example, with auto insurance other factors could be your zip code; the age of the operators; the make, model and age of the car; and even the miles you drive annually. You can ask your insurance company if a credit-based insurance score was used to underwrite and rate your policy and which risk category you were placed in after you receive a quote.

What kind of information goes in to my credit-based insurance scores?

There are several different companies that create credit-based insurance score reports for insurers to use. FICO looks at five general areas it believes will best determine how you manage risk. This is the breakdown of what it considers and how much the information generally weighs in figuring your credit-based insurance score:

  • Payment History (40%) — How well you have made payments on your outstanding debt in the past
  • Outstanding Debt (30%) — How much debt you currently have
  • Credit History Length (15%) — How long you have had a line of credit
  • Pursuit of New Credit (10%) — If you have applied for new lines of credit recently
  • Credit Mix (5%) — The types of credit you have (credit card, mortgage, auto loans, etc.)

What is a Good Credit Score for Insurance?

The bottom line is that your credit score plays a larger role in your insurance score than you might expect. In many instances, a bad credit score can be the single most influential factor in providing you with a less than favorable rating – even if you have a clean driving record and no history of filing claims in the past.

How Can I Improve My Insurance Score?

The single most important thing you can do to improve your auto insurance score is to improve your credit score. That may take time, leaving you with higher than average premiums while you work to make your credit score better by doing the following things:

  • Keep your balances low.
  • Pay your bills on time. This includes credit cards, loans, and even your home utility bills as they can all have adverse effects on your credit history when late payments are reported.
  • Avoid allowing bills to go into collections.
  • Keep your credit accounts to a minimum.
  • Monitor your credit report annually to make sure there are no mistakes and that your information is accurate.
  • Maintain accounts for longer periods of time.

In other words, you must take control of your credit and change it for the better – one account at a time, if necessary. Another thing you should consider is avoiding maxing out your credit cards. You want the limit available on your cards to be high (meaning you have plenty of credit available that you aren’t using) and it is better to have a few accounts open in good standing – especially if they are long-term credit accounts.

Other things you can do to improve your auto insurance score that may be beneficial include things like taking defensive driving classes, driving safely and avoiding tickets.

You should also avoid making numerous credit inquiries in a short amount of time when you’re attempting to apply for auto insurance as this might be a red flag for some insurance providers.

The key is to take the time, now, to begin improving your credit score (and, consequently, your insurance score) so that you can get a better premium when the time comes to apply for auto insurance of your own.

Give us a call to learn more about how your insurance score impacts your premium and how to save money.

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