Inusrance Credit Scoring
Insurance companies use a consumer’s credit score as an underwriting tool for setting rates. A credit score is nothing more than a method of determining the likelihood credit users will pay their bills. Most companies use a score developed by Fair Isaac & Co called a FICO score. FICO is an acronym for Fair Isaac Co. Fair Isaac began developing the credit scoring method in the late 1950s. Since then the concept of scoring has become widely accepted by lenders as a reliable means of credit evaluation given the credit score attempts to condense a borrower’s credit history into a single number. Fair, Isaac & Co. have revealed how they compute the scores. Not their exact algorithm but the categories they use to score and the weight each category is given in the scoring. The Federal Trade Commission has ruled this to be acceptable. This, as you can imagine, doesn’t sit well with some people. They believe that the score most important in our financial lives, our consumer credit score, does not even contain full disclosure. However, it is also argued that it is no secret how to maintain a consistently high score. Simply pay all of your bills on time and your FICO score will stay high. Also, Fair Isaac is under no obligation to disclose the exact algorithm as it is proprietary and, as such, can be protected by law. Insurance companies do not rely only on credit scores. For example, many different factors go into the underwriting of an insurance policy, such as type of vehicle, drivers, location, structure and/or property to be insured, etc. By the way, not all insurance companies use credit scores. They only look at the risk upon which the insurance is requested.
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