Why are my rates so much different from my Neighbor?
This is a question I hear regularly when discussing insurance options with clients and potential clients. People find it hard to understand if they have a clean driving record and an older car, why their insurance rates keep going up, or are more expensive than someone close to them. The main reason for this is an insurance score.
What is an insurance score?
An insurance score is a score calculated from information on your credit report. Credit information is very predictive of future accidents or insurance claims, which is why most insurers use this information to help develop more accurate rates. Each insurer has its own method for evaluating this credit information. Two of the most common factors are:
- Accident and insurance claim history
- Credit report information
The results of this analysis tell underwriters what credit information will help predict how likely you are to have a future accident or insurance claim. They assign a value to each predictive credit factor and add the values to calculate your insurance score.
Are insurance scores the same as credit scores?
No. A credit score is based on your ability to repay amounts you have borrowed. An insurance score predicts the likelihood of you becoming involved in a future accident or insurance claim — it is based on information gathered from policyholders with similar credit characteristics who have had previous claims with a specific carrier.
When banks and other lenders determine credit scores, they may factor in your income, job history and other matters that might affect your ability to repay a loan. Banks also can deny you a loan based on your credit score. Insurers do not consider income or job history, and won’t deny you a policy based on your insurance score.
What credit factors can affect an insurance score?
Favorable credit information results in lower premiums. Because both above-average and below-average factors are evaluated, you still have the opportunity to get a lower rate, even if there are some below-average items in your credit history.
Favorable credit factors might include:
- Long-established credit history
- Numerous open accounts in good standing
- No late payments or past due accounts
- Low use of available credit
Unfavorable credit factors might include:
- Collection accounts
- Numerous past-due payments
- High use of available credit
- Numerous recent applications for credit
These factors vary by state to comply with the laws of each state.
How can I improve an unfavorable insurance score?
While there are some things that are out of your control — having a short credit history, for instance — you can generally improve your insurance score with us by making loan and mortgage payments on time, keeping accounts in good standing, and avoiding numerous credit applications in a short period of time.
Also, look at how much credit you have available. If you are using all or nearly all of your available credit, it could be regarded as an unfavorable factor.
What Other Factors Should I Consider When Evaluating My Insurance Score?
There are a few other factors that are important when deciding when to shop your insurance rates, and why the rates may be higher than you think is reasonable.
- Length of time with your current carrier
- Current Liability Limits
- Amount of claims made
These three factors can make a bigger difference than many people realize. If you have not been with your current carrier for at least 2 years, you are not in a great position to shop your insurance. Having State Minimum liability limits are also unfavorable to your position when shopping. And, even though they are not necessarily considered “at-fault” accidents, a high frequency of tow/roadside assistance claims made through your insurance also hurt your chances of getting the best rates available.
If you are looking to get better rates when the time comes to shop, make sure you find a good agent who will not only help you understand your current position in the market, but also help position you to get the most favorable rates for future renewals and be best positioned when the time comes to shop your carrier.