Insurance companies also using credit scoring methods to determine the premiums you pay. It also turns out that the better your credit score, the more likely you will have to pay less premium that someone with a worse score.

In the year 2000, Metlife published a report that showed the loss ratio of insurance companies against various credit factors. The results reinforces the fact that those with better credit scores make better customers for insurance companies. Here is a sample of the findings :

Collection accounts, Derogatory public records, Late payments, Debt Utilization Ratio, Amounts Past Due were all factors that affected an insurance companies loss ratio. For example, those with no collection accounts had an average loss ratiio of 74.1% versus 97.5% for one collection account and 118.6% for three or more collection accounts. Those with no amount past due had a 70% loss ratio. Once the figure exceeded $100, the loss ratio jumped to more than 90%. Below are a couple of data to illustrate the point.

Collection Accounts – Loss Ratio
None – 74%
1 —– 97.5%
2 —– 108.4%
3 or more –118.6%

Account Status – Loss Ratio
No Late Payments – 72%
One or more Late Payments – 92%

Now the six million dollar question is what goes into an insurance score. Well, unlike the consumer credit space where FICO is the score that is used, each insurance company has their own scoring method. But Fair Isaac, the company that invented the FICO score has given some ideas. Here is a list of things to be aware of :

1. About 40% of an insurance score is determined by payment history. This is against 35% for a consumer credit score. So make sure you pay your minimum payments on time.

2. About 30% of insurance score is based on credit utilization. The same principles apply here as in your regular credit. Use debt sparingly.

3. 10% of an insurance score is based on the length of credit history. This is versus 15% of a regular FICO score.

4. 15% is based on the types of new credit that you have got recently, how long it has been opened etc. In contrast, only about 10% of your FICO score is based on this.

5. About 5% of an insurance score is based on the type of credit used versus 10% for the FICO score. Obviously, the more types of credit you have available, the better it is.

One can argue if there is any causal relationship between having a good credit score and having less claims and being a better customer for an insurance companies. Many consumer advocates are against insurance companies using credit scores at all. Regardless of what you think, they do, and the better your credit score, the better your insurance rates are (especially for auto insurance – health insurance is a slightly different matter).

The moral of the story is that having a good credit score not only helps you get a better rate on your mortgage, auto loans etc, but your insurance premium will probably be lower as well.

This entry was posted on Wednesday, April 25th, 2007 at 16:22 and is filed under News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.