Posted On: August 26, 2008, 11:29 am CDT

Posted By: Ratemaker

Credit is an incredibly powerful predictor of the risk of loss an insured presents. However, the score an insurer uses for underwriting or rating is not the same as the score a bank uses to determine whether to issue a loan.

If your credit report is irregular due to a recent divorce or other life-changing circumstance, make sure the insurer knows it. In these cases, the insurer is supposed to override the score and issue a credit-neutral rate. For the score the insurer computes, they are less interested in the dollars of indebtedness and more in timely payments, etc.

Credit is not used as an indicator of whether or not the premium will be paid for just the reason you say - if the premium is not paid, the policy is going to be cancelled.

Insureds with weak credit histories file claims more often and file more expensive claims. No one is arguing that poor credit CAUSES one to be a bad risk, but it is very strongly CORRELATED with being a bad risk, to an extent that MVR's, CLUE reports, and all the traditional factors do not predict.