Insurance companies look to personal and business credit scores to determine potential risks of insuring an individual’s car, home, or business
Insurance is a game of risk– and to set an accurate (and fair) policy rate, your insurer needs to be able to estimate the risk that you’ll be involved in for an expensive claim. To do that, they’ll need to know more than simply your age, career, and location. So most, if not all insurers, turn to their customers’ credit scores in order to more accurately determine the rate they’ll charge on a policy.
However, the credit score an insurer uses isn’t the same one you’ll see online. Instead, insurance companies use what’s called an “insurance score,” which is a proprietary credit score that’s re-calculated from specific credit indicators, like payment history and total debt.
If you’re purchasing a car insurance policy, credit score may be the main factor determining your rate
Research suggests that an individual’s credit score may be the number one factor that determines their car insurance rates. In fact, a poor credit score, on average, cost drivers an average of $1,031 per year in increased insurance premiums when compared to an individual with a “very good” score. In comparison, a “good” score would only increase a driver’s rate by an average of $233 per year. While less than the penalty for a “poor” credit score, even these mild credit imperfections can add up to a serious amount of money over time– often far more than the additional coverage costs incurred by a moving traffic violation, for example.
Home, health, and life insurance policy rates are greatly impacted by a customer’s insurance score
Your insurance score isn’t just important for your car insurance; it can affect your home, health, and life insurance costs, too. In fact, research suggests that individuals with only “fair” credit paid nearly one third more on their homeowner’s insurance policy in comparison to homeowners with excellent credit.
When it comes to health insurance and credit scores, the relationship between the two is a bit more nuanced. If you receive health insurance through your (or a family member’s) employer, your credit score won’t likely be taken into account during the pricing process. However, if you purchase private insurance on your own, they’ll likely consider it as one of multiple factors affecting the cost of your policy. Despite that, credit scores have significantly less influence on private health insurance rates than car and homeowner’s insurance rates.
Life insurance, however, is a different story. Since research shows that those who can manage their money well often live considerably longer than those who can’t (or don’t), so it’s no surprise that individuals with better credit can usually expect a much better deal on their life insurance. The longer someone lives, the longer they can pay premiums– and the longer the insurance company can wait until they must pay out a death benefit.
Estimating your “insurance score” can be difficult, but that doesn’t mean you can’t take steps to improve it
Unfortunately, insurance companies are not required to tell you any information about your “insurance score,” which can often make it difficult to know how to improve your score– and subsequently reduce your insurance rates. However, consumers are notified when their insurance rates go up due to a decrease in their insurance score. These “adverse action notices” may come by email or traditional mail, but they don’t offer much meaningful information about the exact reasons why an individual’s score changed.
Only Massachusetts, California, and Hawaii do not allow insurers to use customers’ credit scores in order to determine insurance rates. In these states, insurers are limited to using more traditional consumer data, such as income, age, driving history, and career information, to determine an appropriate rate.
While it’s true that your traditional credit score isn’t the same as your insurance score– and activities that raise your credit score won’t necessarily correspond to an uptick in your insurance score, there are several positive steps you can take in order to attempt to improve your insurance score. Things like paying off all loans and bills on time and limiting overall credit card balances, avoiding too many “hits” on your report from loan applications, and limiting the overall number of credit accounts that you currently have open, can help. Insurance claims may also impact your insurance score, so it’s a good idea to keep these to a minimum if possible, especially if you’re currently shopping around for a new policy.
Stay smart, watch your credit, and (hopefully) watch your insurance rates slowly improve
Whether you’re trying to improve your “insurance score” or your traditional credit score, making positive changes can be a slow and painstaking process. However, that doesn’t mean that it’s not worth it; improving your credit and insurance scores can help save you thousands of dollars a year on multiple kinds of insurance policies, which means more money in your pocket– and that’s never a bad thing.
To learn more about how your credit score and your associated “insurance score” could be affecting the amount you pay for car, home, health, and life insurance, contact Avante Insurance today for a free consultation.