principal life insurance Article

Are You Paying More For Insurance Because Of Your Credit Score?
By Stephen Snyder
You've probably heard that insurance companies use credit scores to determine whether to even accept you, and if they do accept you, to determine what you'll pay for your premium.

Well, that's almost right.

Insurance companies don't use FICO credit scores. Insurance companies often use credit-based, "insurance scores," to determine if you are eligible for auto or homeowner's insurance, and how much you'll pay.

The scores that insurance companies use are a little different than the scores the lenders use. However, they are similar in that they look at a lot of the same information as the credit scores used to qualify you for a mortgage or credit card.

Just like a credit score, information from your credit reports is summarized into what's called an insurance credit score. Insurance companies use the insurance credit score to draw their own conclusions about you. Regardless of these small differences, your credit score is generally going to be a good indicator of your insurance score.

Each state has its own unique take on insurance scoring. Some states allow insurance companies to use insurance scores to make a decision to grant insurance coverage or not. Other states prohibit it. Still, most states allow some version of a credit score to determine your insurance premium.

To a lot of people, allowing insurance companies to use credit information seems unfair.

For example, a bankrupt person with a stellar driving record could see their insurance rates go up drastically just because the bankruptcy appears on their credit reports and lowers their credit scores and insurance credit scores.

So what's the difference between the scores lenders use and the scores insurance companies use?

Insurance companies do not depend on scores to predict whether or not you'll make your insurance payments on time (like a lender does). They are more interested in whether or not you will be a profitable insurance customer.

And what makes you a profitable insurance customer? You're profitable by paying your premiums and not filing any claims.

You can also be a profitable insurance customer by paying your premiums and not filing any large dollar claims. And that's exactly what they use insurance credit scores to predict.

Lender credit scores are designed to predict whether or not a late payment incident will occur. Insurance credit scores are designed to predict whether or not you will be a profitable customer.

Clear as mud, right?

The bottom line is that the insurance companies say they have been able to prove, time and time

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again, that there is a strong statistical relationship between your credit management and your likelihood of filing insurance claims.

In addition, insurance companies claim to be able to show that consumers who have lower insurance credit scores cost them more in claims than consumers who have higher insurance credit scores.

What they haven't been able to prove is why there is a connection between credit scores and increased incidences of claims. This is where much of the controversy stems from.

Regardless, insurance companies have a right to use credit information to evaluate your application for insurance. It's called a permissible purpose and it's clearly spelled out in Section 604 of the Fair Credit Reporting Act. It's the law.

Article Source: http://articles-galore.com

Stephen Snyder is the founder of the After Bankruptcy Foundation a non-profit organization that provides free bankruptcy information and recovery steps. Stephen also writes a free weekly newsletter on bankruptcy recovery.

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