What Is An Insurance Score: Everything you Need to Know

what is an insurance score

What Is An Insurance Score: Everything You Need to Know

Investing in insurance coverage is the best and most practical way to secure your and your family’s future. However, as with any other investment, you must pay a monthly premium to keep your insurance active.

Insurance premiums differ from one member to another, and various factors determine your monthly premiums, such as age, gender, and risk factors. In some states, insurance providers also utilize a credit-based insurance score to determine your insurance premium.

However, only a few people know what insurance scores are and their importance. Without knowing these, you might unknowingly do something with your finances that would make your insurance premiums higher than average.

In this blog post, we’ll teach you everything you need to know about insurance scores. What are they, why do you need to know them, how will you know your current insurance score, and how can you improve your current insurance score?

We’ll answer all of these questions here, so keep reading!

 

What Is an Insurance Score?

A credit-based insurance score, or simply an insurance score, is the rate of possibility you’ll make a claim based on your credit score. Relatively speaking, individuals with higher credit scores are less likely to make claims; hence they often get lower insurance premiums.

This is the logic many insurance providers apply when evaluating your credit score.

A higher insurance score will often result in lower premiums. On the other hand, individuals with poor credit scores are more likely to make claims and thus get higher premiums.

However, this is only a part of the many factors insurance providers consider when evaluating your insurance premiums. Other factors, such as claims history, marital status, age, and risk factors, are also considered.

 

Are They the Same as Credit Scores?

When talking about insurance scores, many assume it’s the same as credit scores. Although they are similar in some ways, there is a huge difference between them.

The Consumer Financial Protection Bureau (CFPB) best explains the definition of credit loans:

 

“A credit score is a prediction of your credit behavior, such as how likely you are to pay a loan back on time, based on information from your credit reports.”

 

In contrast, insurance scores “predict” how likely you are to make a claim relative to your credit score. It’s important to understand that insurance scores don’t reflect your financial behavior.

Although your insurance scores heavily rely on your credit score, it also considers your past claims and other factors. Your insurance score might not be on the same standing, even if you have an impressive credit score.

 

Why Is it Important?

Insurance providers use a scoring system for various reasons, such as:

  • To determine the risk associated with insuring you.
  • To help insurance providers accurately and fairly price their policies.
  • To ensure fairness among all insured individuals.
  • To minimize loss by only insuring people who can meet their premium.

Simply put, insurance scores are important because they help insurance providers manage risk and offer affordable premiums to their members. It’s important to keep in mind that the insurance scoring system only applies to several states.

California, Hawaii, Massachusetts, Maryland, and Michigan are some states that don’t use credit-based insurance scores. In other states, they may impose varying rules and limitations with this type of scoring system.

 

What Factors Determine Your Insurance Score?

Insurance providers use different factors to determine your insurance score; this includes the following:

  • History of credit use
  • Outstanding debt
  • Payment history
  • Bankruptcy or financial issues
  • Number of credit accounts and inquiries
  • Length of credit history
  • Types of accounts
  • Insurance claims made in the past
  • Age and marital status

 

Insurance providers may even consider your driving record and other factors to determine your insurance score.

As you can see, insurance providers do not only rely solely on your credit score. As a result, you may have different insurance scores compared to your overall credit score.

 

How Is It Calculated?

As previously mentioned in this blog, the formula to compute your insurance score depends on your insurance provider.

But despite their different criteria, all insurance providers consider the following factors when determining your insurance score:

 

Past Credit Performance

Your historical credit performance is one of the main factors used to calculate your insurance score. It refers to your consistency in paying your bills promptly and your credit utilization rate.

An excellent past credit performance means you’re keeping up with your bill payments and maintaining a low utilization rate. This could indicate that you know how to manage your credits and finances.

 

Existing Debts

Another factor used to calculate your insurance score is the amount of money you owe to lenders. This includes any outstanding debts that you have yet to settle.

If you have a high balance on credit cards and other loans, this may affect your insurance score negatively. This factor shows your insurance provider how much financial risk you may present in the future.

 

Length of Credit History

The length of your credit history also plays a role in determining your insurance score. A longer credit history may be seen as more ‘stable’ due to its low volatility and greater predictability.

Insurance providers cannot tell how well you can manage your finances if you don’t have a credit history. As a result, this may cause them to become more cautious when insuring you.

 

New Credit Applications

Insurance providers may also consider how often you apply for new credit cards and other loans.

Multiple applications in a short time can be seen as financially irresponsible, resulting in an unfavorable score, even if you have a good credit history.

 

Multiple Credit Lines

The number of credit lines you have is also considered when evaluating your insurance score.

If you are seen to have too many open lines of credit, insurers may think that you are overextending yourself financially and, thus, present a greater risk for them.

 

Do All Insurers Use the Same Criteria?

Not all insurers use the same criteria when evaluating your insurance score, and some may emphasize certain factors or employ their proprietary algorithm to determine your score.

It’s also important to remember that different states may have different rules and regulations on credit-based insurance scoring. That’s why it’s essential to research and talk with a trusted insurance agent to understand what criteria best fit your needs.

When applying for an insurance policy, shopping around and comparing quotes from various providers is vital. This will help you understand which insurers offer the best rates and terms.

Understanding how most insurance providers in your state recognize and calculate your insurance score is crucial. This will enable you to make the right decisions that can positively impact your insurance score and overall financial health.

 

What Is a Good and Bad Insurance Score?

Insurance scores range from 200 to 997. A score of around 626 to 775 is considered average by many insurance providers.

If you ask most insurers around the country, they’ll tell you that a great insurance score is around 775 or higher. On the other hand, a ‘bad’ insurance score can be anything below 501.

  • Poor: 200 to 500
  • Below average: 501 to 625
  • Average: 626 to 775
  • Good: 776 and higher

 

How Can You Improve It?

There are many ways you can improve your insurance score. The steps you take to boost your credit score are also applicable when trying to improve your insurance score.

Here are some tips to help you bring your insurance score up:

 

1. Eliminate Your Debt First

When it comes to loans and finances, debt is your biggest enemy. If you have any outstanding debt, you should prioritize paying them off before attempting to increase your insurance score.

It would be great to speak with your creditor and devise a realistic repayment plan for your debts. This way, you can slowly and steadily eliminate your debt without significantly damaging your personal finances.

 

2. Stay On Top of Your Bills

Remember our discussion about credit performance earlier? Staying on top of your bills is one of the best ways to ensure you don’t negatively impact your credit score.

Make sure you pay your bills on time and in full, so you can consistently maintain a good credit history that reflects positively on your insurance score. Insurers can see your payment history and consider it when calculating your insurance score.

 

3. Minimize Your Credit Card Usage

Credit cards are predominant in America. In fact, it is estimated that around 83% of American adults have one active credit card, according to the statistic published by the Federal Reserve in 2021.

Americans often use their credit cards for making purchases, paying utilities, and more. But too much reliance on credit cards could negatively impact your insurance score.

Limiting your credit card use to only what is necessary will help ensure you don’t overextend yourself financially. This will go a long way in maintaining a healthy insurance score.

 

4. Limit New Credit Applications

When insurance providers evaluate your credit, they also consider the number of times you’ve applied for new credit or requested a higher limit. Applying for multiple lines of credit does not only damage your credit score, but it can also drag your insurance score down.

If you need to apply for a new line of credit, do your homework and research your chances of getting approved. A denied credit application could lower your credit score and, in turn, hurt your insurance score.

 

5. Be Smart With Your Credit Usage

You don’t have to forego your credit card to salvage your insurance score. You can still enjoy the convenience and perks of having a credit card while maintaining a good insurance score.

The key is learning to prioritize and be mindful of your credit usage. Keep in mind that no credit history is as bad as having a low credit score.

You still want to utilize your credit card, but make sure you don’t overspend or get into financial trouble. Paying your credit card bills on time and in full is the best way to ensure that you can maintain a good insurance score.

 

How Long Will It Take To Improve It?

There’s no definite timeline when it comes to improving your insurance score. It all depends on your current situation, what score you’re aiming for, and how much debt you have to repay.

Generally, it could take you months if you are starting with little to no debt or a slightly better credit history. But if you already have a substantial debt, it could take up to years or longer to improve your insurance score.

Regardless of how long it takes, always remember that it is possible to improve your insurance score with dedication and patience.

 

Conclusion

Maintaining a good insurance score is not easy, and it’s even harder to bring it up from a low score. Improving your insurance score takes a lot of work, patience, and self-discipline.

Regardless, it’s not impossible. With the right knowledge and guidance, you can take steps to get your insurance score back on track.

You can slowly but steadily improve your insurance score by eliminating your debt, staying on top of your bills, limiting your credit card usage, and being smart with your financial management.

There are no shortcuts when it comes to financial security, and the best thing you can do is to start today.

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