Wednesday, 30 December 2015

Does the CIBIL score impact insurance?

The world over, a credit score goes beyond just availing a loan or credit card. Today, various services are using scores to determine whether to offer their services to a consumer, including telecom connections. Even landlords choose to check a credit score before deciding whether to rent out their property to a prospective tenant. Similarly, in global markets, what you pay for insurance is determined by your credit score.


What exactly is a credit score?
A three-digit number usually between 300 and 900, a credit score indicates your financial health. Based on parameters such as your previous credit history, length and type of accounts held, lenders (banks and other financial institutions) use this score to determine how risky it would be to lend to a particular customer, that is how likely you are to pay off your debt.
A good score shows that you are more likely to clear any outstanding dues, and will smoothen the way when you want to avail of credit both in terms of sanction as well as the interest rates that you would need to pay.
What is a CIBIL score?
Does a CIBIL score differ from a credit score? While that is a pertinent question, the answer is no. CIBIL is the oldest of four credit bureaus in India – the other three being Equifax, Experian and CRIF High Mark – and hence very often, a credit score is generically termed as a CIBIL score.
All the four bureaus however offer credit reports, and while the scores may differ slightly, the basis for calculating the scores is similar.
How is a credit score related to insurance?
World over, especially in the USA, insurance companies have been using credit scores to determine the premium rates, with regards to auto (or car) insurance for around the past 20 years or so. There is a correlation between the premium and a credit score, where insurers believe that a higher score should get you a lower premium.  In some American states, for example, consumers could wind up paying a differential of as much as USD 500 and more.
However, not all states in the USA are in sync with this practice. Some states such as California and Hawaii have banned this practice, as they believe that a low score does not necessarily justify a higher premium. Further, this is compounded by the fact that some insurers use their own credit scoring model and not necessarily one that is provided by credit bureaus such as TransUnion, Equifax and Experian. One school of thought for it to also not be accepted is, because using this model amounts to discriminating against applicants.
The Indian scenario
Currently, usage of credit report is largely restricted to financial services offerings by lenders, such as loans and credit cards. Usage across industries has yet to catch on, and hence the impact of a CIBIL score on insurance premium is not calculated at present.
However, given the insight (related to payment patterns) that a score offers, the day is possibly not far when Indian insurers (be it life or general insurance) also jump on to the credit score bandwagon.
What is slowly emerging as a fact though is apparent – in order to remain finally fit, it is equally important to be credit healthy. It is prudent to check your CIBIL rating at regular intervals and stay one step ahead.

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