1. Money

What is a Financial Stability Discount?

Credit Scores and Insurance Premiums

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Car crash Peter Dazeley/Photographer's Choice RF/Getty Images

After looking through your insurance paper work, you may be surprised to see a disclosure from your insurance company stating they are using your credit score to determine your rate. More and more insurance companies are using your credit score to help determine the future likelihood of a claim. The only state that prohibits insurance companies from using your credit score is California. Every other state makes is optional for the insurance companies and many are taking advantage. Find out what a financial stability discount is on your insurance policy.

How is the Financial Stability Discount Calculated?

It takes a private investigator to get to the bottom of the financial stability discount. Insurance companies that use the financial stability discount each have a unique proprietary scoring system that is kept hush-hush. The scoring system does not directly correlate to your true credit score; however, it is heavily based on it. When an insurance company checks your credit score it does not negatively affect your true credit score like it does when you open a new line of credit. It is considered a soft hit on your credit score. To get the best financial stability discount, keep your credit score as high as possible.

Affect on Premiums

The range in price from the best score to the worst can be startling. The financial stability discount can make or break you, literally. The discount can be a huge plus to those people with good scores. Insurance companies utilizing the insurance credit scoring system usually break the discount down into a tiered system. The higher your credit score the higher tier you are placed in. If you find yourself in the bottom tier you could be paying hundreds of dollars more than someone in the highest tier.

Why Does an Insurance Company Need to Know My Credit History?

Insurance companies are always trying to predict the likelihood of a claim. The higher risk for a claim, the higher premium you pay for your insurance. Numerous studies have been done which have determined a direct correlation between your credit score and the likelihood of a claim. The results show the lower your credit score the higher your chances for a claim. Many people view the financial stability discount as stereotyping, but it remains a popular rating system for the insurance companies.

Do I Need to Give the Insurance Company My Social Security Number?

Your rating will be more accurate if your social security number is given during the quoting process. Insurance companies can often pull your social security number by using other personal information such as your name, birth date, and address. If you have recently moved the insurance company probably will not be able to access your records without your social security number. Someone with bad credit could possibly benefit from withholding their social security number because there is a chance no records can be pulled and you could be rated more favorably. Someone with a good score can benefit from the financial stability discount and should release their social security number to take advantage of the discount.

Some insurance carriers may not allow a new policy to be submitted without a social security number. If this is the case, and you are not comfortable giving out your number, you may need to look for a different carrier. Ask the agent if your social security number is required to purchase the policy if you are concerned with releasing the information.

Policies Affected by Insurance Credit Score

Basically, if an insurance carrier is using the financial stability discount, it is affecting all of your policies. Car and home insurance is where the biggest impact is seen. You can find out if your insurance company is using and insurance credit scoring system by looking through your paper work for a said credit score, or just ask your insurance agent if credit plays a factor in your rate.

Your credit score plays a big role in your financial life. One good thing about the scoring system is you always have potential to improve, that is if you haven't already maxed out with the best score. Insurance companies continue to check your score periodically at your renewals to look for improvements or drops in your insurance credit score. Pay special attention to the situation if your insurance company is using your credit score as a rating basis for your insurance premiums.

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