Understanding Insurance Credit Score

When it comes to calculating your insurance rates, you may be surprised to learn that your credit score can play a significant role. This is because insurance companies use a metric known as the insurance credit score to determine your likelihood of filing a claim and your overall risk as a policyholder.

What is an Insurance Credit Score?

An insurance credit score is a numerical rating that is based on an individual’s credit history. It takes into account factors such as payment history, credit utilization, length of credit history, and types of credit accounts. Insurers use this score to help them evaluate an individual’s financial responsibility, and thereby assess their level of risk as a policyholder.

It is worth noting that an insurance credit score is different from a traditional credit score. While they are both based on credit history, a traditional credit score is used to evaluate an individual’s creditworthiness, while an insurance credit score is used to evaluate risk as a policyholder.

How is an Insurance Credit Score Used?

Insurance companies use an individual’s insurance credit score as a factor when determining the cost of coverage. Generally, individuals with higher insurance credit scores are seen as less risky and can be offered lower premiums, while individuals with lower scores may be seen as higher risk and may be offered higher premiums or denied coverage altogether.

It is worth noting that not all insurance companies use an insurance credit score in their underwriting process. However, for those that do, it can be a significant factor in determining rates.

Why is Credit Score Important for Insurance?

The use of credit scores in insurance underwriting is based on statistical data that suggests a correlation between credit history and the likelihood of filing a claim. According to the National Association of Insurance Commissioners, research has shown that individuals with lower credit scores are more likely to file claims and have a higher likelihood of experiencing insurance losses.

As such, insurance companies use credit scores as a way to assess risk and determine rates. While not everyone agrees with the practice, it is legal in most states and is widely used in the industry.

How Can You Improve Your Insurance Credit Score?

If you are concerned about your insurance credit score, there are steps you can take to improve it. These include:

FAQs

What is a good insurance credit score?

There is no one-size-fits-all answer to this question as insurance credit scores can vary by insurer and state. However, generally speaking, a score of 700 or higher is considered good, while a score of below 600 is considered poor.

Can you be denied insurance based on your credit score?

Yes, in some cases insurance companies can deny coverage based on an individual’s credit score. However, this practice is not allowed in all states and is subject to certain restrictions.

Do all insurance companies use an insurance credit score?

No, not all insurance companies use an insurance credit score in their underwriting process. However, many do, and it can be a significant factor in determining rates and eligibility for coverage.

Can checking my insurance credit score hurt my credit?

No, checking your insurance credit score will not hurt your credit. This is because when you check your own score, it is considered a “soft inquiry” and does not impact your credit rating. However, when an insurer checks your score as part of the underwriting process, it is considered a “hard inquiry” and can impact your score.

How often should I check my insurance credit score?

You should check your insurance credit score at least once a year to ensure that it is accurate. You can request a free copy of your insurance credit report annually from each of the three major credit bureaus: Equifax, Experian, and TransUnion.

Conclusion

While the use of credit scores in insurance underwriting may be controversial, it is a common practice in the industry. Understanding how your insurance credit score is calculated and taking steps to improve it can help you save money on insurance premiums and ensure that you are treated fairly by insurers.