Credit scores count. It is always a hard fact. When you applied for a credit card or tried to a mortgage for a house, you encountered these credit scores already. However, they do not only apply to these situations. You will be surprised that they also exist in car insurances. And believe it or not, they play an essential role in determining the cost of premiums that you are going to pay. It has the same level of importance to your marital status, payment history, and overall driving record.
Many auto insurances in the United States are implementing credit-based insurance scores so that they can determine the kinds of risks they are dealing with whenever they are offering quotes. This practice, however, is banned in the states of California, Massachusetts, and Hawaii.
Credit-Based Insurance Scores vs Credit Scores
Of course, there are differences between credit scores and credit-based insurance scores, even though they sound the same.
Credit scores, or known as FICO scores, are derived from the information coming from the credit report of a person. They are utilized by lending institutions to calculate the likeliness of an individual to pay his or her loan on time. Credit scores also determine the loan qualifications and interest rates.
Based on the report of the Insurance Information Institute, credit-based insurance scores do not include your gender, history, job, and other personal information in the equation. According to the III, the factors used on these credit-based insurance scores are your total debt and payment history. It is the very basis they use to analyze your risk level thoroughly. Car insurance companies then use the information to help them determine the likelihood of a policyholder to get an insurance claim in the future.
How Does Credit-Based Insurance Scores Work?
Many of the insurance companies in the United States are using credit-based insurance scores and pair them together with your claims history, driving history, and other related factors in determining your eligibility for various payment plants. These inputs help insurance providers in establishing the insurance rate of any given policy. Again, this practice is not present in Massachusetts, Hawaii, and California.
If you have a high credit-based insurance score, zero claim history, and excellent driving record, you will get lower rates in your insurance quotations. While a credit-based insurance score is important, it is going to show that it is just one of the factors being used by insurance companies in calculating premiums. For instance, even if you have a high credit-based insurance score, if your driving record is poor, then companies will still see you as a risky policyholder.
So Why Insurance Companies Are Still Using Credit-Based Insurance Scores?
Various research suggests that these credit-based insurance scores have high accuracy in predicting the tendency of a driver to get involved in an accident. Statistical analyses indicate that those people who have low insurance scores are likely to get insurance claims. Believe or not, insurance companies don’t want people to get a claim frequently. It hurts their business.
Meanwhile, those who have high credit scores are expected not to get involved in vehicular and road accidents. Insurance companies see them as excellent policyholders. They always give them low premiums whenever a quotation is needed. In fact, the Federal Trade Commission took an independent study to analyze the relationship between claim risks and credit history. The result of the study reflects those studies that have been conducted before. Specifically, it found out that credit-based insurance scores are accurate predictors of risks.
Types Of Credit Inquiries
The Consumer Financial Protection Bureau said that there are two types of credit inquiries: soft and hard.
Hard Credit Inquiries
When a person applies for credit, inquiries made by the insurance company will appear on their credit report. Accordingly, credit checks are also considered as hard inquiries. They influence the overall credit score of people since there are marks on the frequency and recency they have applied for credit. Hard inquiries are often factored in the decision of creditors.
When you are the one that reviews your credit score, that’s a soft inquiry. It is the same thing as well if your credit score is being reviewed by prospective companies and other lenders whom you have existing accounts with. But according to the Consumer Financial Protection Bureau, this will not affect your overall credit score.