June 2009

Insurance scores can be influenced by credit reports

In March 2008, Virginia Farm Bureau Mutual Insurance Co. began incorporating insurance scores into insurance premiums for personal auto customers. Insurance scores are not new, just something new to Farm Bureau.

“The implementation of insurance scores has enabled us to be more competitive in the insurance market,” said Tim Johnson, Farm Bureau personal lines supervisor.

“Farm Bureau was one of the last insurance companies to use insurance scores in the rating of automobile coverage. Insurance scoring has provided more competitive rates and enabled us to write more business.”

What is an insurance score, and how does it differ from a credit score?

• An insurance score is a number that helps an insurance company determine one’s likelihood to file a claim, based on a snapshot of credit information. The less likely one is to file a claim, the lower the premium charge.

• A credit score is used by a financial institution to help determine the likelihood that a loan applicant will have difficulty making payments on a loan. The less likely one is to default on a loan, the lower the loan rate.

“Primary factors affect the score,” Johnson said. “If your score is in a higher range you receive a discount, which you may have noticed on your declaration page.”

Insurance scores are based on information from consumer credit reports that insurers obtain from the three major credit bureaus: Equifax, Experian and TransUnion. A score is based on such information as:

• outstanding debt;
• length of credit history;
• late payments, collections and bankruptcies;
• new applications for credit; and
• types of credit in use.

Address, age, ethnicity, gender, income, marital status, nationality, religion and disabilities are not used in the development of a score.
Since the insurance score is based on information in a credit report, which reflects credit payment patterns over time, there are ways to improve a score:

• Pay bills on time. Delinquent payments and collections can have a major negative impact.
• Keep balances low on unsecured revolving debt like credit cards.
• Apply for and open new credit accounts only as needed.
• Use credit responsibly. It’s also a good idea to periodically obtain a credit report from the credit bureaus to check for inaccuracies. Report any errors to the credit bureau, which is required by law to investigate and respond within 30 days. Small errors can have little or no effect on a score.

Review the information in a credit report from each credit bureau at least once a year. Under the Fair and Accurate Credit Transactions Act of 2003, consumers are entitled to one free credit report per year from each of the bureaus. Consumers can order free credit reports at www.annualcreditreport.com or by calling 877-322-8228.