Having credit, and managing it effectively, is an increasingly critical aspect of nearly everyone's life. Your credit history, as reflected at the major national credit reporting agencies, can have a tremendous influence in your life. Today, that influence may include being one of the factors your insurance company evaluates to help determine if you qualify for their underwriting programs, and at what rate. But understanding how your credit history affects your insurance options can be a challenge. A great way to understand the role credit plays in your life – and to empower yourself as a consumer – is with a basic knowledge of FICO® Credit-Based Insurance Scores.
When evaluated with other information like claims and driving record history, your credit-based insurance score (also known simply as an insurance score) helps an insurance company in most states determine whether you qualify for insurance based on their underwriting guidelines, and what rate you'll pay.
Your insurance score is a snapshot of your insurance risk at a particular point in time. It is a number based on the information in your credit report that shows whether you're more or less likely to have claims in the near future that will result in losses for the insurance company. As with all FICO® scores, the higher your score, the less risk you represent.
Insurers use insurance scores along with other risk information, such as motor vehicle records (for auto insurance), loss history reports, property inspections (for property insurance), and application information to evaluate new and renewal auto and homeowner insurance policies. It helps them decide, "If we accept this applicant or renew this policy, will we likely be exposed to more losses than our collected premiums will allow us to handle?"
In addition, by using insurance scores, insurers can better forecast future performance and thus make sure that each person pays a rate that more closely corresponds to the risk of loss they represent. This means that if you are less likely to have claims that will result in losses for the insurance company, your insurance company can offer you a lower premium. And because those that will likely have claims (or larger claims) will end up paying higher premiums, insurance scores help your insurance company make sure that you won't end up paying more than you should to help cover someone else's future claims. The bottom line is that because the majority of people have good credit, even during turbulent economic times, most people will pay less for insurance when an insurer considers insurance scores in its underwriting and pricing decisions.
The insurance score most often used by insurance companies was created by FICO and is referred to by different names at the different credit reporting agencies – InScore® at Equifax, Fair Isaac® Insurance Risk Score at TransUnion, and the FICO® Insurance Score at Experian (available from LexisNexis).