What is an insurance score?
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Insurance companies use many different factors to determine your premium. These factors can vary depending on the state you live in, but in most areas, your carrier may use your age, gender and ZIP code to calculate your premium. Another important factor that can determine your rate is your insurance-based credit score. Whether you are a new insurance shopper or only want to switch providers for a better deal, your credit-based insurance score can impact the price you have to pay for your policy. Having a basic understanding of what goes into your insurance score and how it is utilized can help you save money on your auto and homeowners insurance by reducing your risk as a customer.
What is an insurance score?
Statistically speaking, those with higher credit scores are less likely to file a claim with their insurance company. As such, insurance companies use information from major credit rating bureaus to create their own rating system, akin to a credit score for insurance. This rating system is called a credit-based insurance score. Your insurance score helps your insurer determine your risk as a policyholder. Because premiums are determined based on risk, your insurance score can impact how much you pay for insurance.
However, not all states allow the use of insurance scores as a factor for determining auto insurance rates. The states that prohibit or restrict credit from being used as a car insurance rating factor are California, Hawaii, Massachusetts and Michigan. The states that prohibit credit from being used for homeowners insurance rates are California, Massachusetts and Maryland.
Why is an insurance score important?
Insurance scores play a significant role in calculating the cost of your insurance premiums, according to the Insurance Information Institute (Triple-I). Insurance companies assess how much risk they incur to provide coverage to a customer. This expected cost, amongst other factors, is used to determine how much the company should charge a customer in premiums to avoid losing money.
The vast majority of insurers in the U.S. are private businesses and cannot survive without making a profit. Without the use of insurance scores, companies would have less accuracy in predicting a customer’s cost. To offset this increased margin of error, companies would likely need to raise the rates on all customers.
How is an insurance score calculated?
Insurers use several factors to determine your insurance score. Everything from payment history to outstanding debt to credit mix is calculated into your score. Each of these variables can be obtained from your credit report. Below are the most critical factors, as listed by the National Association of Insurance Commissioners (NAIC). The percentage shows how much of your insurance score is determined by each variable.
- Previous credit performance (40 percent): Everything from missed payments to punctual payments is the primary factor used in insurance and credit scores because it helps insurers from an idea of your premium payments.
- Outstanding debt (30 percent): How much money you owe at the time of the report is of great importance to the insurance provider because it tells the company how likely you are to pay premiums regularly and file a claim.
- Credit history length (15 percent): The amount of time you have had a line of credit, whether credit cards, loans, mortgages or another format, goes into determining your insurance score.
- Pursuit of new credit (10 percent): New applications for new lines of credit can imply increased risk. Even if you are handling your current credit limits and debts well, adding another line of credit could destabilize your rating.
- Credit mix (5 percent): While this has the smallest impact amongst all other factors, the variety and number of credit lines you have can affect your insurance score.
What is a good insurance score?
Insurance scores range from good to bad. The higher your insurance score, the better an insurer will rate your level of risk in states where insurance scores are a rating factor. According to Progressive, insurance scores range from 200 to 997, with everything below 500 considered a poor score, and everything from 776 to 997 considered a good score.
So, what is a good insurance score? Anything over 775. However, please note all insurers have different underwriting standards for rating auto and home policies.
|776 – 977||Good|
|626 – 775||Average|
|501 – 625||Below average|
|200 – 500||Poor|
How to improve your insurance score
Thankfully, there are many ways to improve your insurance score. For the most part, strategies and techniques for improving credit scores will also increase your credit-based insurance score. The primary approach is to treat your credit and bills with as much financial responsibility as you can. This means paying bills on time, keeping your credit utilization rate at or below 30 percent, quickly paying down debt and meeting financial agreements and contracts.
To see your credit score and track when and how much it is improving, you can go to www.annualcreditreport.com for free copies of your credit reports. When you use this link, you will be given copies of your credit report from each of the three primary credit bureaus. If your credit score is improving, it’s likely your insurance score is as well. Because of the pandemic, you are allowed to access your credit reports weekly through this site, instead of annually as had been the process previously.
Frequently asked questions
In most states, insurance scores are used to determine your auto and home premium. However, some states have laws limiting which types of policies can use credit reports to calculate premiums. For example, some states limit the use of an insurance score to auto or home insurance, while other states allow your score to be used with all insurance policies.
Anything that makes your credit score worse will negatively impact your insurance score. Being late on your bills and debt payments, taking out excessive lines and types of credit and maintaining a high credit utilization rate can reduce (worsen) your insurance score.
Like California and Massachusetts, some other states prohibit insurers from using credit-based insurance scores when calculating auto and homeowners rates. For instance, Maryland prohibits insurers from using insurance scores when calculating home insurance rates but allows its usage for auto insurance quotes. The laws vary by state; however, most states allow credit-based data to help determine rates. Check your state’s laws to see if your insurance score could affect your car or home insurance rates.
Your insurance score is calculated from your credit report to determine how expensive you are to insure. Your credit score is calculated from the same report but to determine how likely you are to go delinquent on a debt. Each uses overlapping variables, but the formula, outcome and purpose are all different. Please note that all insurers engage proprietary underwriting guidelines so how they use insurance scores to determine your rate can vary.
Typically, your insurance score is the same whether the product is home or auto insurance. However, this can vary depending on your insurer’s underwriting process, and whether the same company provides your home and auto insurance. It can also depend on what state you reside in and if there are regulations prohibiting usage of credit as a rating factor.