Your credit rating can affect a lot more than you might think. Almost all insurance companies factor in credit ratings to set rates for new and existing Auto insurance customers. Yet, blemished credit doesn’t necessarily translate into higher insurance premium rates. Instead, it is the overall insurance risk score that can cause a rise in your rates.
Insurance risk scores are similar to those used by lenders to determine whether or not to approve a loan or line of credit because both look at your credit information. But credit risk models are formulated to predict the likelihood of loan default. Insurance risk models, by contrast, are built to predict the likely loss ratio of any particular individual. In other words, whether you will result in more or fewer losses than average to the insurer. The higher your insurance risk score, the less likely you are to file a claim.
Following is the information many insurance companies use to formulate a risk score and how each is weighted:
- Past payment history (approximately 35%). A past payment history is determined by: how you’ve paid your credit bills in the past; if your bills have been paid on time; items in collection status; the number of adverse public records (bankruptcy, wage attachments, liens); and the number and length of delinquencies or items in collection.
- Credit owed (approximately 30%). Credit owed is how many accounts, what kind of accounts, and how close you are to your credit limits.
- Length of time credit has been established (approximately 15%). Length of time credit established is how long you have had your credit accounts and how long you have had other specific accounts.
- New credit (approximately 10%). New credit is the number and proportion of recently opened accounts versus already established accounts; the number of credit inquiries; and the reestablishment of credit history after payment problems.
- Types of credit established (approximately 10%). Types of credit established are the various types of credit accounts including credit cards, retail store accounts, installment loans and mortgages.
In summary, insurers rely on factors that show long-term stability. So, by demonstrating responsible use of credit and keeping your balances low, you should be able to improve you insurance risk score. A lower insurance risk score could translate into lower insurance premiums if you’ve been impacted by a negative credit history in the past.