To protect his credit, a customer froze his credit accounts. While this measure protected their credit by preventing anyone from opening a line of credit in their name, they were also concerned about how it would affect their insurance rates. Great question, because in Pennsylvania, credit score can be used to develop an insurance score.
A credit report is specific information relating to a consumer’s use of credit. It contains information such as where you live, how your bills are paid, how much you owe, how long your credit history is, and whether there have been any legal actions such as financial judgments, tax liens or bankruptcy filings.
A credit score is a number based on your credit history that ranks your creditworthiness. The factors in your credit report are multiplied and divided in many ways to arrive at your credit score.
When an insurance company sells your home or auto insurance, they collect information about you and assign you an insurance rating. Companies find insurance scores to be a good measure of your likelihood of filing P&C insurance claims. They are not the same as your credit score, but they are similar.
Assurance scores are made up of many data points. Credit score is just one of them.
Every insurance company has a secret formula for determining insurance ratings. The reason the formula is secret is because of the competitiveness of the industry. The company that can best price a policy based on risk will not only be profitable, but will be able to provide the lowest cost at the best risk. The more data points a company uses, the more accurate the odds, the more accurate the price/risk ratio.
Each insurance company uses your credit report factors differently, so it’s important to shop around to find the best price for your policy. Also, if your insurance company’s agent tells you that you don’t qualify for their best rate because of your credit score, ask what exactly that means.
Remember that a company that only uses a credit score in their formula may not give you the right rate.
In Pennsylvania, companies can use your insurance score when you first take out your policy and can use it when you renew to lower your premium. Insurance scores cannot be used to increase your insurance premium at renewal time.
A good way to keep tabs on your credit information is to check your credit report with all three credit bureaus. Dispute anything you find incorrect – there is no penalty for disputing incorrect information! There are three different credit bureaus.
Some creditors report to only one office, while others may report to more than one.
To make sure your reports stay correct, you might consider ordering a free credit report every four months and rotating your requests to each company. You can now get your credit report for free.
You can contact the credit bureaus individually, or you can get a report of all three through the website: www.annualcreditreport.com.
Bob Hollick is a Washington-based State Farm Insurance agent. His column appears every other Friday in the Observer-Reporter.