Most consumers are aware that insurance companies use a modified version of your credit score when underwriting Auto and Homeowners insurance (and increasingly, business insurance as well). Certainly, at least 90% of the companies we deal with use this tool. Having top-notch credit will save you money on insurance, and if you have good credit and haven’t shopped your coverage in the past two or three years, you’re probably paying more than you need to.
However, like everything else, the use of credit by insurance is slowly changing. To start, lets look at why insurance companies use credit. Having bad credit doesn’t cause people to have insurance losses. However, there is a proven correlation between credit score and insurance losses; people with lower scores, as a group, have more losses than people with higher scores. While there is speculation as to why this is so, nobody really knows that answer and it actually isn’t an important question. What matters is there is that ‘special something’ about higher scores that insurance companies reward with lower rates.
However, since the companies began using this measurement tool, the modification of credit scores has become big business with services like ‘freecreditscore.com’. These services teach people how to make their scores higher so they can reap the benefits of a high score, and not just for insurance. But people aren’t changing their underlying behavior; they are learning how to ‘trick’ the scores to make them higher. Hence, the statistical validity of the scores that the insurance companies rely upon is slowly eroding.
What does this mean? It means that eventually credit will cease to be the important factor it is today. It may still be used to a lesser extent, or it may be dropped entirely. But today behind the scenes it is already having its use diminished.
In Connecticut, a company can only use credit when the policy is first applied for. If a person’s credit deteriorates, it cannot be used against them upon renewal. To get around this, companies are looking at an insured’s payment history with the insurance company as a rating factor. The upshot is that cancellations and even late payments can be used as rating factors, and can cause renewals to increase significantly. Conversely, insureds with good payment histories will be rewarded with lower rates.
What’s good about this is it is within your control. There are lots of things you can do to avoid paying your insurance late. First, most companies offer automatic payment programs; either electronic fund transfer or recurring credit card payments. Often, companies reward these payment programs upfront with reduced premiums and fees. Also, many companies give discounts for paying in full, up front, at a rate of savings much higher than you can earn on your money in conventional investment channels. So not only will you save on renewal, you can save significant money up front as well.
One way to think about this is that the insurance comapnies don’t want to chase their policyholders for money, and they will handsomely reward their policyholders who are with the program. Controlling your credit score and controlling your payment history with your insurance company are two things that you can do with little effort which will pay you back over time better than almost any investment (other than a lucky stock pick) you can make. Take some time and check them out.