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How your credit score can cost you if you are insuring your home or car

By Faye Mergel
Published: Monday, December 13th, 2010

The cost of insuring your home or car could increase if the credit history is not good, as increasing number of auto insurance companies consider the credit history of policy holders before giving credit.  The insurance sector has always believed that the credit history plays a vital role as it reflects the customer’s payment patterns and hence the risk is greater with customers who have a poor credit history.  While providing insurance cover to policy holders insurance companies are wary about extending credit to these customers.

The credit scores are used by insurers in various ways.  While some companies use it as a benchmark to decide on the rates, the others use it for underwriting.  There may be companies who never use it at all.  The customers with poor credit are most often penalized unnecessarily and may be no more risky than the rest of the policyholders.  However, these insurance companies are similar to traditional lenders in many ways as they too depend on the credit scores of individuals.  This personal information that is obtained is used to gauge the risk factor but this may have many differences.

Insurance scores in general are designed to predict insurance losses, while credit scores only predict the likelihood of delinquencies due to nonpayment.  Not all of the credit information is used to develop these insurance scores and only some of these factors are used.

These credit-based insurance scores have gained popularity and have been used since the past 20 years.  Today its use is widespread.  FICO scores are in the lead when it comes to financial scoring and almost 95% of auto insurance policies as well as 90% of homeowners’ policies today use the credit-based insurance scores.

The model which could be applied while using credit card data is still unclear as insurers themselves agree that although the data is useful they are yet to come to a consensus about its application.  Most lending decisions are made on the basis of the FICO score but in the insurance sector there is no particular model that is in place.  There are different scoring patterns that are used currently including those that have been developed by third-party vendors and those that are built individually by insurance companies.  Insurance companies consider the length of credit history, bankruptcies, outstanding debt, late payments, and new applications for credit etc as the factors that they take into consideration.

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