Most states allow insurance companies to review a policy holder’s credit report and credit scores and use it as one of the factors for calculating insurance premiums. The question then becomes: Is credit history a valid basis for determining whether or not a policyholder will file a claim?
Validate the Credit Source
One of the biggest problems with using credit reports in determining insurance premiums is that credit reports have errors. Whether the policyholder knows it or not, their insurance premiums are being determined based in part on a credit report that may not have accurate information.
In 2004 US Public Interest Research Group (PIRGs) conducted a survey on the subject of credit reporting errors. Of those surveyed, 79% responded that there were errors on their credit report. Of those with errors, 25% indicated that the errors were serious enough to negatively affect their ability to secure credit.
In addition to credit reporting errors, illegal actions such as identity theft will negatively affect your credit. Add to the mix economic conditions that are out of your control such as the mortgage crisis, rising unemployment, inflation, increase in home foreclosures and the rising cost of goods and services, struggling consumers find their credit scores dropping which also has a negative impact on their insurance rates (which in turn increases the insurance rate and adds to the financial burden).
Insurance Rating and Extenuating Circumstances
The young (who have not yet established a credit profile), the old (who don’t use credit so readily) and individuals who opt to live the debt free life can conceivably be penalized with higher insurance premiums for not having credit or not having enough credit. Additionally, newly divorced, widowed or individuals undergoing a medical emergencies may undergo a severe shift in their credit rating which can negatively affect their chances of getting a low insurance rate.
Why Credit Reports are Used in Determining Insurance Rates
According to a July, 2007 report, Credit-Based Insurance Scores: Impacts on Consumers of Automobile Insurance compiled by the Federal Trade Commission, purportedly individuals with a lower credit score are more likely to file automobile claims than policyholders with high credit scores. According to the Property Casualty Insurers Association of America (PCI) insurance scores are an accurate insurance rating tool. In a July 20, 2007 release they confirm their opinion by stating, “In fact, insurance scores were found to be a better predictor of claims than driving records.”
Reducing High Insurance Rates due to Poor Credit
Whether it seems fair or not, insurance companies use credit history as one of the factors when rating policies. Therefore, if you know you’re going to purchase insurance in the near future, get a copy of your credit report and review it before the insurance company does. After reviewing the credit report, correct any errors found. In the meanwhile, take the necessary steps to make positive credit score changes.