by C. L. Easey

Created on: February 12, 2009

Most insurance companies have begun to use an individual's credit score as a basis for the premium that they pay for a policy. Insurer's use credit scores to calculate premiums because they are a statistical factor of risk, add to the cost of a policy and can only be used as a discount in many states. Basing premiums on credit scores in today's economy is no longer a good basis to judge an individual's level of risk.

Most insurance companies have begun to use credit scoring in their calculations for rates that factor into an insurance premium. They are doing this because they are seeing statistical evidence that people with a lower credit score are more likely to be involved in an accident. However, there are groups that are challenging insurers use of credit score because it is seen as discriminating a specific group of society. Whatever the reason insurers continue to use credit scoring it will remain until laws are passed to ban the use of the practice to calculate an insurance premium.

Many people may not realize it but the use of a credit score to base an insurance premium adds to the cost of a policy. They can do because people with a lower score are going to pay more for their premium that those with a higher score. To look at it another way someone who has bad credit, especially in today's economy, is going to pay a higher insurance premium that someone who has good credit. On the face of it it is plausible for insurance companies to claim bad credit shows additional risk, but it is also true that not everyone that has bad credit is gong to be getting into accidents.

The use of credit scoring by insurance companies is regulated differently depending on what state an insured has their insurance policy. Some states allow the use of a credit score to effectively add a surcharge to an insurance premium. Other states, wary of the practice, only allow the use of a credit score to act as a discount on an policy. This can have different effects depending on what company is providing the policy. States that allow the use of a credit score as a discount are going to see higher rates for those who have a lower credit score.

Today's economy is affecting many people's ability to obtain credit and is having a detrimental effect on their credit score. As a result people that are trying to save money on their insurance are being penalized because of their credit score. The use of credit scores is no longer a viable way to judge an individual's level of risk and should not affect their premium.

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