You hit another car; your auto insurer probably raises your premiums. But you may not know that your premiums can shoot up much higher if your car insurance company is using a new breed of credit score, even if you have a pristine driving record. Known as credit-based insurance scores, these numbers are computed from your bill-paying and loan data collected by the major credit bureaus. In recent years, the scores have become as important in determining your annual premium as your driving record and the neighborhood where you live. Hundreds of insurers are using models created by ChoicePoint and Fair Isaac, the Minneapolis company that invented credit scoring. Others have developed their own systems. The scoring models stress bits of credit data that would seem to have little to do with a driver's tendency to make claims. There are no standards: Each company uses different models and weighs different credit-report information. Some big companies find scoring useful only for new customers, not renewals, while others may use it for both. Auto insurers use this credit information to produce an insurance score" because they believe it allows them to more accurately assess and price a risk. In conjunction with other information such as years of driving experience, previous accidents, the type of car or home, and where the driver lives and drives, credit-based insurance scores allow insurers to differentiate between lower and higher insurance risks. These scores are not a measure of someone's financial assets, but of how you as an individual manage your financial affairs. Insurance scores are supposed to be highly accurate predictors of future loss in auto insurance. The statistical correlation between good credit and relatively low insurance losses presupposes that the responsibility required to prudently manage one's finances is associated with other types of responsible and prudent behaviors, such as proper maintenance of homes and autos, and safe operation of cars. Many recent studies confirm the strong correlation between credit history and loss in both auto and homeowners insurance. Neither insurers nor the credit-scoring companies that discovered the relationship know what causes it. It is believed that generally people with a pattern of irresponsible financial behavior and poor credit history have a much greater chance of being in an accident or filing a claim. But the other studies, such as the Monaghan study, which reviewed those long-standing inferences, say that links between responsible financial management and future expected losses are "unsupported." Either way scoring could cost you hundreds of extra dollars. Even a driver with a fantastic credit score, who rates a low-interest mortgage, could wind up with a less favorable insurance score and thus a high premium. That's because formulations for insurance scores weigh credit data differently from traditional lender scores. There is a way to check. Under the Fair Credit Reporting Act of 1970, insurers are required to notify consumers if they experience adverse action, such as denial, premium increase or cancellation of coverage, due to information contained in their credit report. Consumers also have the right to have errors in their credit report corrected and can request that the insurance company recalculate their insurance score and reevaluate their insurance coverage and premium.
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