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Understanding How
Your Credit History May Affect Your Car Insurance Coverage
Many personal auto insurance companies consider your credit information
when determining how much premium to charge for your insurance. So if you
are calling around for new insurance, keep in mind that many insurers are
looking at your credit history. I hope that we will be able to let you
know why and how they do this.
The reason that some insurance companies use credit information is because
they feel there is a direct correlation between consumer's credit history
behaviors and expected claims that may occur. Therefore, they feel that
people with better credit behavior are less likely to have severe
insurance losses.
Many insurance companies still use your age, driving history, type of
vehicle, and where you live, in determining how much you should pay for
your insurance. Therefore, if you have not established a credit history
yet, the companies that use credit history may not be best for you. They
may not allow you to be eligible for certain discounts, which could result
in higher premiums.
The companies that do use credit scoring will still use other factors in
determining your premium. They will also use your age,
driving history,
type of vehicle, and where you live in determining how much you should pay for
your insurance.
Is it fair for an insurance company even look at my credit information
without my permission? The answer is yes. The Federal Fair Credit
Reporting Act says "Reasonable procedures. It is the purpose of this title
to require that consumer reporting agencies adopt reasonable procedures
for meeting the needs of commerce for consumer credit, personnel,
insurance, and other information in a manner which is fair and equitable
to the consumer, with regard to the confidentiality, accuracy, relevancy,
and proper utilization of such information in accordance with the
requirements of this title." This can be found at
http://www.ftc.gov/os/statutes/fcra.htm
If you feel that your credit history is better then the insurer can find,
make sure the insurer has your correct name, address, social security
number, and date of birth.
Some insurance companies will look directly at your actual credit reports
when determining your rate, however most will use what is called an
"insurance credit score." An insurance credit score is developed by using
statistical techniques and methods to predict the likelihood a consumer
will have a higher than anticipated loss. These are similar to what
lenders use to predict the reliability of an applicant repaying a loan.
Insurance companies use many factors in determining your credit score.
Here are some examples of those factors:
Public records: bankruptcy, collections, foreclosures, liens, charge-offs,
etc.
Past payment history: the number and frequency of late payments and the
days between the due date and late payment date.
Length of credit history: the amount of time you have been in the credit
system.
Inquiries for credit: the number of times you have recently applied for
new credit, including mortgage loans, utility accounts, and credit card
accounts.
Number of open lines of credit:
the number of credit cards, whether you
use them or not.
Type of credit in use: major credit cards, store credit cards, finance
company loans, etc.
Unused credit: how much you owe compared to how much credit is available
to you.
Your insurance credit score may differ from company to company, as they
will use different factors in determining your premium. Notice that we
call it an insurance credit score. This means that it encompasses many
factors including credit.
Since each insurance company uses different techniques to determine your
credit score it is hard to tell you what a good credit score is. Usually a
good credit score will result in lower premiums.
Your agent or company is not obligated to tell you your credit score. In
fact, they might not even know what it is. All they usually know is that
your credit score qualifies you for a specific rate or policy. Some
companies also offer better rates under each qualifying tier.
If you feel that there is incorrect information on your credit report, you
should tell the credit bureau. If you report an error, the credit bureau
must investigate the error and get back to you within 30 days. You can ask
the credit bureau to send a notice of the correction to any creditor or
insurer that has checked your file in the past six months. Once the errors
are corrected, it is a good idea to get a new copy of your credit report
several months later to make sure the wrong information has not been
reported again.
The three national credit bureaus are:
Trans Union (
www.transunion.com
or 800-888-4213).
Equifax (
www.credit.equifax.com or 800-685-1111).
Experian
(
www.experian.com or
888-397-3742).
Tell your insurance company. Do not wait until the credit bureau
investigates the errors to contact your insurer. Tell your insurance
company right away and ask if the errors will make a difference in your
insurance. If the errors are big, tell your insurer that you are disputing
the information and ask if they will wait to use your credit information
until the errors are corrected. Small errors may not have much affect on
your insurance credit score. If the errors are big, it can make a
significant difference in your premium. Some companies are unable to
adjust the premiums until the score is corrected, but it does not hurt to
ask.
If you have taken the steps to improve your credit score, you should ask
your insurance company to re-evaluate your credit score at renewal
Disclaimer: This article is for information purposes. It should not be
interpreted as a recommendation to buy or sell any insurance product, or
to provide financial or legal advice. This information is provided for
information purposes only.
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