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- What is an Insurance Score and Its Impact Upon Amount of Your Car Insurance Premium
What is an Insurance Score and Its Impact Upon Amount of Your Car Insurance Premium
An insurance score is a rating used to predict the likelihood that a customer will file an insurance claim. This score is based on an analysis of a consumer's credit rating, and the method for calculating it varies from insurer to insurer. While many companies use proprietary formulas to calculate the scores, the factors used in the calculation include the customer's outstanding debt, length of credit history, payment history, amount of credit in the form of loans, available credit and monthly account balance.
Unlike a credit rating, which uses personal financial information to determine your ability to repay debts, insurance score calculations do not factor in your income. This omission means that it is very possible for you to be penalised for taking out a large loan or charging a large amount on your credit cards each month even if your income is more than enough to cover the expenses.
Car insurance companies justify the use of insurance scores by citing studies that apparently show a positive correlation between credit scores and insurance claims. At some level, this may seem to make sense. At the level of minor traffic accidents, for example, it is reasonable to argue that individuals with poor credit are more likely to file claims, if for no other reason than the fact that they lack the funds to make repairs on their own.
Of course, if we look at the logic behind car insurance scores we might want to look at it also from a business perspective: insurance scoring is quite profitable, especially since almost nobody qualifies for the lowest-tier pricing. Keep in mind that car insurance premiums are a recurring revenue stream for car insurance companies, and the scores help justify higher car insurance premium.
A perfect insurance score, in the eyes of an insurance company, represents a client with the lowest possible risk of filing a claim, so - since the probability of filing a claim is based on credit - good credit is the key to a high score. A good credit report can have such a large impact on your car insurance premium that you can, for example, have a flawed driving record but good credit and pay less for your car insurance than a driver who has a perfect driving record but bad credit. Do keep in mind, however, that your insurance score is not the only factor that determines your premium.