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Insurance and Your Credit Report

Insurance companies use several factors to determine your premiums, including your driving record, age, the type of car you drive, marital status, and your address. But increasingly, companies are using your credit history as an indicator of how likely you are to file a claim. Called an insurance risk score, this controversial number is calculated using a special formula similar to a credit score but developed specifically for insurers. This formula is currently unavailable to consumers; however, many states are currently considering legislation to regulate the use of this score. In fact, Maryland and Washington have passed laws that restrict the use of credit information by insurance companies.

A few things have been made public about your insurance risk score recently. We now know that five main financial factors are evaluated to calculate your insurance risk score:

1. Your payment history: Your record of paying credit bills in the past, number of adverse public records (i.e. bankruptcy, collections, liens), and the amount of delinquencies on your credit record account for about 35% of your insurance risk score. This is the largest factor in your insurance rating.

2. Amount of debt you owe: The number of accounts you have open, the types of accounts, and the amount you have charged all combine to count as 30% of your risk score.

3. Length of credit history: The amount of time that you've had credit and the specific length of time that you have had certain accounts make up 15% of your risk analysis.

4. New credit: 10% of your risk analysis is calculated based on your recent credit activity. Your number of new accounts, recent inquiries, and efforts to re-establish troubled credit are grouped into this category.

5. Types of credit in use: The number and activity of credit accounts including credit cards, retail store accounts, and mortgages count for another 10% of your risk evaluation.

Although consumers can't access their own insurance risk score, simply knowing that your credit history is used by insurers can help you get a better deal. If you have excellent credit, you may want to use it to your advantage and shop around for the best insurance rates possible. If you have troubled credit, you may want to stay with your current insurer until your finances improve.

By understanding some of the credit factors that go into your insurance assessment, you are empowered to improve your insurance risk score. Take charge of your credit and get the insurance rate you deserve.

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