What Are Insurance Scores and How Do They Affect Your Rate?

Credit-based insurance scores play a key role in how much insurers charge you for coverage. If you’re looking to lower the amount you pay in auto, homeowners and other premiums, it’s important to understand how these scores work and how you can improve them over time.

What is an insurance score?

According to an article by finance writer Julia Kagan for Investopedia, an insurance score uses information from your credit score to determine how likely you are to file a claim. This score includes factors like your payment history, outstanding debts, new credit applications and credit history length. It also incorporates your previous history of filing insurance claims. A lower score means that an insurance company will probably view you as a higher-risk customer — and may even deny you coverage. Insurance scoring is used by a variety of insurers, but it’s an especially important factor for auto insurance companies.

How does this score affect insurance rates?

If you have a lower insurance score, insurers are likely to charge you higher premiums as a way to offset what they perceive as their extra risk. For example, a 2018 study by WalletHub concluded that people with no credit (the key factor for insurance scores) pay 67 percent more for auto insurance than people who possess excellent credit. It’s important to note that your insurance score isn’t the only factor that companies use to determine your premium. For auto insurers, your actual driving safety record, the vehicle you own, your age and your location also play an important role in how much you’re charged.

Who tracks and calculates your score?

How insurance scores are tracked and calculated varies widely across the industry and can depend on the type of insurance in question. According to WalletHub, auto insurers typically rely on three score providers. FICO’s service calculates scores within a range of 250-900. LexisNexis tallies scores ranging from 500 to 997. TransUnion’s auto insurance score spans a range of 300-850.

How can you find out your score?

Credit reporting agencies are required to provide your credit report and scores for free, but finding out your insurance score is a bit trickier. You’ll have to pay to access scores tracked by the major providers. You can also check with your insurer or potential insurer to find out which scoring system they use and how heavily they weight it in determining premiums.

How can you improve or maintain your score?

The best way to improve your insurance score is to improve your regular credit score. You can do this by reducing your debt and credit utilization, making on-time payments and engaging in other financially responsible behaviors. You’ll also want to make sure your lifestyle and driving habits put you at lower risk for needing to make insurance claims. Another way to improve your insurance score is to move to a state where insurers are banned from using your credit score to help determine your premium. Your credit history is off-limits to insurers in California and Massachusetts. Hawaii bans it specifically for auto insurers, and Maryland bans it for homeowners insurance.

Your credit score has the potential to affect many aspects of your financial life — including the amount you pay for insurance. Along with improving your overall financial health, maintaining or building good credit over the long run can help lower your premiums and make shopping for insurance less of a hassle.

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