If you’ve ever applied for a home, auto, personal or small business loan, you probably already know or figured out pretty quickly that your credit score plays a large part in the interest rate you’ll pay or if you can qualify for financing at all. What you may not realize is the fact that your credit score can also determine what you will pay for insurance premiums.
Insurance companies underwriting departments have been using what’s called a credit-based insurance score (CBI score) since the early 1990’s to calculate the risk of the insured having an insurance claim/loss. The insurance underwriting departments will collect data from one or all three of the major U.S. Credit bureaus; at this time the data will be entered by the underwriters in a computer program that generates the score for them. FICO estimates that 95% of auto insurers and 85% of homeowners’ insurers use credit-based insurance scores in states where it is allowed.
What Factors Into a Credit-Based Insurance Score
An ideal CBI score is typically 760 and above and a riskier score is 600 and below, according to the Insurance Information Institute. The score that you receive will depend on several factors, per the National Association of Insurance Commissioners:
- Payment history, indicating the timeliness of payments made on any outstanding debt (this makes up for 40% of your score)
- Unpaid debt, this is the amount of money you currently owe to creditors (30% of your score)
- Length of credit history, which is the time you’ve had a line of credit in place (15%)
- New credit history, indicating if and when you’ve recently applied for new lines of credit (10%)
- A mix of credit, which represents the categories and types of credit you currently have, such as a mortgage, student loan, and credit cards (5%).
Your CBI score can be negatively affected by having judgments, liens, bankruptcies, and repossessions within the last five years of applying for insurance.
Important Things to Remember about Your Credit-Based Insurance Score
Insurance companies DO NOT consider the following in the calculation of your Credit-Based Insurance Score:
- Income
- Ethnic Group
- Gender
- Religion
- Disability
- Nationality
- Public Assistance Sources of Income
Having a higher CBI and good driving record allows insurance companies to charge you less for your insurance premiums.
Don’t give up hope on saving money on those premiums. Your CBI score is much like your FICO credit score; there are ways to improve both scores.
Here are some steps you can take:
- Pay all your household bills on time.
- Pay your credit card balance on time each month, stay below your credit limits. A Balance of 30% or below the credit card limit is ideal.
- Think twice before opening up new lines of credit, be credit wise and do not overextend yourself
- Don’t get your credit pulled (hard hit) more than ten times in a 12 month period.
- Monitor your credit report on a credit monitoring sites such as www.freecredithub.com to make sure your report is accurate and resolve any errors or discrepancies you discover as soon as possible.
Last but not least, do not make frivolous insurance claims, shop around occasionally, make sure you are getting the most amount of coverage for the least amount of money. Nothing contributes to high insurance premiums like a lackadaisical or naive consumer. Don’t be the consumer who stays with the same company for years without knowing what shape their credit is in and by not taking the time to compare insurance companies and rates. The Arkansas Insurance Department published a report in 2015, analyzing the impact of credit scores on different lines of personal insurance. Across all lines of coverage, the department found 86% of consumers with credit-based insurance saw their premiums decrease or not be affected at all. If it has been a while since you had a quote you reach out to CLC Insurance Group to see if you can save.
