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What Is Credit Scoring And How Does It Work?

Published on August 22, 2017   Tips Info

Insurance is an ever evolving industry and the latest evolution is the introduction of a discount based on your credit score. While this discount was introduced a few years ago, it is now used by the majority of insurance markets. Insurers have introduced this discount to help them charge the appropriate amount for the risk they are assuming.

Insurance companies have determined that an individuals credit score is a strong indication of the likelihood of a customer will file a claim. Their studies have shown a direct correlation between a person’s credit score and the frequency/severity of insurance claims.

While insurance companies are rewarding those individuals with a good credit score, they are not penalizing anyone with an unfavourable credit score.

How it works

It's important to understand that it is your choice whether or not to allow the insurance company to access your credit score, it is not mandatory to provide this information.

As your insurance broker we collect your verbal or written consent before authorizing the insurance company to check your credit. Once the insurance company is given your consent, it will remain valid for as long as you're a customer or until you withdraw your consent.

Once the insurance company receives your consent they will request your credit score electronically using secure methods. Based on the rating they receive the appropriate discount is either applied or no discount is applied, depending on what the credit score is. It is important to note that we (One Insurance) do not have access to your credit score information.

Since your credit score can change year over year, the insurance company will continue to check your credit on the renewal of your insurance policy, providing that you haven’t withdrawn your consent.

When the insurance company does the credit score check it DOES NOT impact your credit rating, as they are only doing a “soft” check.

What Factors are used for scoring?

As mentioned a credit score inquiry will not affect your credit score although an inquiry will be recorded on your personal credit report.

Credit scores include a variety of credit characteristics, such as:

  • payment or credit history
  • outstanding debt amounts
  • length of credit history
  • type of credit in use
  • foreclosure and bankruptcies

They DO NOT include information such as:

  • income
  • race
  • religion
  • gender
  • age
  • ethnic group
  • disability
  • marital status
What happens if I have an unfavourable or no credit score?

If the insurance company finds that you have an unfavourable or no credit score, you simply won’t be eligible for the discount. They do not surcharge the policy or penalize you for such results.

Can I improve my credit score?

If you know you have an unfavourable credit score you can take steps to improve your credit score.

  • Following are some tips on how to improve your credit score:
  • Always pay your bills on time.
  • Try to pay your bills in full by the due date. If you aren't able to, pay at least the minimum amount shown on your monthly statement.
  • Try to pay down your debts as quickly as possible.
  • Don't go over the credit limit on your credit card. Try to keep the balance well below the limit, as the higher the balance, the more impact it has on your credit score.
  • Reduce the number of credit applications you make.
  • Make sure you have a credit history. Your credit score may be low because you don't have a record of owing money and paying it back. You can build a credit history by using a credit card - as long as you use it wisely.
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