What Is the Connection Between Credit and Insurance Scores?

An insurance score is used to forecast the likelihood of applicants or policyholders filing insurance claims, and it is generated using data from their credit history. Insurance score calculations are largely based on information on credit reports and therefore often referred to as credit-based insurance score. In a large majority of states, auto insurers are allowed to consider this information in their premium calculations, in addition to other variables like an applicant’s driving record, insurance history, age, location, and the vehicle specifications.

While insurance score determines applicants’ risk profile by predicting their likelihood of making a claim on personal line policies like home and auto, credit score measures credit worthiness of a person and used when someone applies for a mortgage, loan, credit card or other similar facilities. Insurance score is a point system that uses components of credit history but doesn’t take the credit score as a given figure.

There are several companies that create credit-based insurance score reports for insurers to use. FICO is one of them and looks at five general areas in a credit history to determine the credit-based insurance score:

  1. Payment history (40%): How well you’ve managed past debt payments.
  2. Outstanding debt (30%): The amount of current debt.
  3. Credit history length (15%): How long you’ve had credit accounts.
  4. Pursuit of new credit (10%): Recent credit applications.
  5. Credit mix (5%): Variety of credit types (e.g., credit cards, loans).

These scores are mainly concerned about financial activity to determine risks to insurers and don’t look at other personal information in a credit report.

Your insurance score is an important factor in determining insurance premiums, but it is just one of many factors that insurers take into account when providing a quote. Insurers also consider factors such as your driving record, claims history, insurance history, age, gender, zip code, and the rating of your vehicle. The premium you are quoted is the result of a comprehensive evaluation that takes into consideration these various aspects to assess the risk associated with insuring you and your vehicle.

It’s worth noting that every insurer assigns varying importance to insurance scores when calculating premiums, making it advisable to obtain multiple insurance quotes. This way, you can determine which company views your specific details more favorably overall when selecting an insurer.

Credit reporting is a common practice that collects extensive financial data about individuals. Insurance companies use this data to calculate insurance scores, adding an extra dimension to their risk assessment for setting premiums. While credit scores primarily evaluate the risk of default on credit, insurance scores focus on predicting future insurance losses from claims. The primary goal is to assess risks equitably and precisely, enhancing the underwriting process’s thoroughness.

Having a low credit score is typically associated with a less favorable insurance score, and vice versa as they are correlated. It is easier to get your credit score and checking it is beneficial for other purposes as well. Improving your credit score can lead to more affordable car insurance rates.

It is important to emphasize that an insurance score isn’t a fixed figure; individuals can actively work to enhance it by adopting responsible financial practices. This includes making timely payments, reducing debt, minimizing the number of credit accounts, and avoiding excessive credit applications.

In conclusion, it’s imperative for drivers to monitor their credit reports since they play a key role in risk assessment when applying for home or auto insurance quotes. These reports are among the primary factors insurers consider when determining premiums. By taking a few straightforward measures, individuals can safeguard their credit scores from slipping, potentially saving them money. Additionally, maintaining a healthy credit profile not only aids in loan and mortgage approvals but also secures more favorable interest rates.