What Is an Insurance Score?
You may have heard about credit-based insurance scores and how they’re increasingly being used to determine insurance rates. Given their impact on your premiums, it’s important to understand what an insurance score is, how it differs from a credit score and why it matters.
Understanding insurance scores
A credit-based insurance score, also known as an insurance score, provides a snapshot of your insurance risk at a given time, based on information in your credit report. Payment history, outstanding debt and the length of your credit history are all taken into consideration, which helps predict the likelihood of you filing a claim.
Because insurance scores have proven to be a sound predictor of future loss, insurers use them alongside other factors, like driving records and past claims history, to evaluate new and renewal policies. This helps insurance companies price their policies more accurately, offering lower premiums to those with stronger insurance scores, thus encouraging responsible financial behavior.
How insurance scores differ from credit scores
Just as a bank uses your credit score to assess the risk of lending you money, insurance companies use insurance scores to evaluate the risk of insuring you against potential future losses. While insurance scores focus on factors related to insurance claims, credit scores measure your ability to repay borrowed money. As a result, these scores can differ significantly. For example, your driving history may affect your insurance score, but not your credit score.
It’s important to note that an insurance score is just one of the factors that influences the price of the insurance policy. Depending on the type of insurance, your insurance company may consider your age, location, gender and more.
When your insurance carrier reviews your credit history, it doesn’t impact your credit rating. However, the inquiry will appear on your credit report as a "soft pull," which doesn’t affect your score and is only visible to you.
How insurance scores are calculated
A strong credit history can significantly impact your insurance premiums. Drivers with higher credit scores may see rates that are up to 88% lower than those with poor credit. Given this difference, it's important to understand how insurance scores are calculated.
Your credit information is processed through a computerized model that analyzes the data and generates an insurance score. These scores are dynamic and can change as new information is added to your credit report. Insurance companies typically request your current score when reviewing a new insurance application or renewing an existing policy to ensure they have the most up-to-date information.
A credit-based insurance score is generally based on factors such as payment history, length of credit history, the amount of outstanding debt relative to credit limits, types of credit used and recent credit applications. These criteria may vary by state.
In most states, you can contact your insurance carrier to obtain your insurance score. However, in some states, insurance scores are provided by a third-party vendor, and due to the proprietary nature of this information, the scores cannot be disclosed by the insurer.
It's important to note that insurance scores don’t include your income, race, marital status, religion, geographic location, nationality, ethnicity or disability. They solely reflect your credit history.
How insurance scores impact insurance premiums
A healthy insurance score typically reflects responsible financial behavior, such as timely payments, low debt levels and a long credit history.
- Auto insurance score: Your auto insurance premium is influenced by your insurance score, along with factors like your driving record, vehicle type and prior claims.
- Home insurance score: For home insurance, including condo and renters policies, your insurance score plays a role in determining your premium, alongside factors such as your home’s location, construction type and any previous claims.
At Amica, we use insurance scores as one of many factors to determine the most accurate premium for you, alongside driving records, past losses, and specific characteristics of your vehicle or home.
Tips for improving your insurance score
Improving your insurance score can lead to lower premiums on your insurance policies. Here are some actionable steps you can take:
- Paying bills on time: Regularly making payments on time is a strong indicator of financial stability and can positively impact your insurance score.
- Reduce debt: Work toward paying down credit card balances or loans. Lower debt levels may contribute to a better insurance score.
- Low credit utilization: Keep your credit usage low and avoid opening new lines of credit to help maintain or improve your insurance score.
- Monitor your credit report: It's important to review and understand your credit report regularly. Small inaccuracies or negative marks can have an impact on your insurance premiums. According to the Consumer Financial Protection Bureau, if you find incorrect information on your credit report, you’re able to dispute it with the reporting agency by sending a letter with all relevant information regarding the discrepancy.
Consistently practicing good financial habits not only improves your credit and insurance scores, but also supports your overall financial health.
Insurance scores are crucial because they help insurers predict the likelihood of you filing a claim. A higher insurance score can result in lower premiums, rewarding responsible financial behavior. Understanding and improving your insurance score can lead to savings on auto, home, condo and renters insurance.
For additional strategies to reduce your insurance costs, check out our articles on How to Lower Your Car Insurance and 6 Ways to Save Money on Homeowners Insurance.
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