How new VantageScore credit scoring model affects insurance rates

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Chris Kissell

A new credit scoring model could affect the rates you pay for auto insurance and homeowner's insurance.

Changes to VantageScore have improved its ability to predict future defaults by borrowers, and will result in the company providing credit scores for tens of millions of additional Americans, VantageScore spokesman Jeff Richardson says.

"Our goal with this model is to provide lenders and consumers with a highly predictive credit score that is easy to understand," Richardson says.

Dubbed "VantageScore 3.0," the new product holds several advantages over the previous model, according to Richardson.

  • More accurate gauge of the likelihood of default. Richardson says VantageScore pulled credit reports with a given score from an earlier period, then looked at how those consumers behaved later. The new model predicted defaults at a 25 percent better rate than earlier models.
  • Greater number of consumers eligible for credit scores. VantageScore now can formulate credit scores for up to 30 million consumers who previously were considered "unscoreable," mainly because they had little or no credit history. The new model achieves this through several methods, such as collecting information about rental and utility payment history, and reaching back 24 months (instead of the traditional six months) into a consumer's credit history.
  • New scoring range. VantageScore has modified its scoring range to 300 to 850, which corresponds to the scoring range of the FICO credit score, which remains the industry standard. The previous VantageScore range was 501 to 990. The new range is intended to be less confusing to lenders and consumers.

VantageScore is the credit scoring model developed by the three major credit bureaus (Equifax, Experian and TransUnion) and unveiled in 2006 as an alternative to the FICO credit score.

FICO remains the most widely used scoring model, but the use of VantageScore is growing. VantageScore says seven of every 10 financial institutions use its model when evaluating borrowers' creditworthiness.

Effect on insurance rates

While credit scores do not affect your insurance rates by themselves, credit is a major component of an insurance score, which is based on someone's credit history. Insurers use insurance scores when determining how much a policyholder's premiums will be.

Studies have shown a link between a person's credit history and how risky that person is to an insurance company's financial interests, according to Mike Barry, a spokesman for the industry-backed Insurance Information Institute.

"People who have a poor insurance score are statistically more likely to file a claim," he says.

Barry says insurance underwriters are likely to welcome any development - such as the VantageScore change - that makes it easier for them to assess the financial risk of a potential policyholder. This way, they can more accurately judge whether to insure someone, and what rate to charge that person.

"The more comprehensive the information, the closer the insurance company can come to making appropriate decisions," Barry says.

Whatever your score, Barry says it's important to remember that the use of credit-based insurance scores varies widely among insurers. A handful of states ban the practice.

Some insurers use credit-based insurance scores only to rate new customers or those who are adding vehicles to their policies, Barry says. Meanwhile, other insurers use such scores for "almost all aspects of their business," he says.

Because insurers treat credit-based insurance scores so differently, experts say it's a good idea to compare insurance quotes before settling on a policy.