Most insurance companies have begun using consumer credit information when writing auto and homeowners insurance policies. This practice, known as insurance scoring, enables insurers to make accurate underwriting and rating decisions so that all policyholders are charged fairly for their insurance coverage.
In conjunction with reports provided by one of the three major credit bureaus and the use of various statistical models developed specifically for the insurance industry, companies order an insurance score for each policyholder which inputs credit information into a predetermined formula to calculate the scores. The score, which ranges from 200-997, uses the following credit variables in its calculation: outstanding debt, length of credit history, late payments, new applications for credit, types of credit used, payment patterns, available credit, public records, and past due amounts. A high score indicates a responsible use of credit. The number is meant to represent an individual’s pattern of credit use over a period of time, so a single late payment or high balance should not drastically affect your overall score. However, because the score is a snapshot of your credit history taken at a given point in time, the score will change over time as your credit history changes.
Insurance scores are not the same as the credit scores that banks use to qualify you for a loan. Although both use credit information, insurance scores are developed using a unique mathematical formula that predicts the likelihood of future insurance claims.