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Link between Credit Score and Insurance Companies

By Janet Lacey
Published: Tuesday, June 25th, 2013

Ever wondered how the insurance companies decide the payable premiums? Over the years, commercial banks have used credit scores to determine whether a client is a good risk. They use the credit scoring system to issue credit cards, auto loans and mortgages. In the recent past credit scores have found new uses in insurance and phone companies. They are using the score to determine whether to approve you for a service and determine terms and conditions. Insurance companies use the score to determine your premiums. A higher score means you are less of a risk and therefore likely to get the cover on lesser premiums. There are several terms associated with the score.

Credit scoring

This is a system that is used by creditors to determine whether to give you credit. It is also used to determine the terms under which the loan is offered and the payment rate. Your bill paying history, the accounts you operate and their types, how you pay your bills, collection actions and your outstanding balances are some of the factors used in the system. Once the creditor has this information, they are fed into a statistical program and compared with their other clients who have profiles similar to yours. Each of the factors is then awarded points. The total number of points then your credit score. The creditor assumes that you are likely to behave in a similar manner to other clients who have a similar profile. By comparing your profile with their current clients, some insurance companies also use this score to determine your likely hood of making a claim, the amount of the claim and your likelihood of defaulting premiums. These scores are sometimes called insurance scores or credit-based insurance scores.

How it is developed

To develop the score, insurance companies use samples or models. Random samples are selected from the company’s customer’s base. Customer characteristics that that relate to risk are then determined. Each characteristic is then assigned a weight-age depending with how critical that factor is. Each insurance company has its system.
How to improve your score?

The credit scoring system is a complex system and varies from company to company and for different uses e.g. insurance and credit. A change in any of the credit score determining factors will definitely affect your score but the change will depend with the weight-age assigned to that factor. However, some factors generally improve your score. They include; time you have had credit (the longer the better), whether your debts approach your credit limit among others.

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