What Exactly is an Insurance Credit Score?
Insurance credit scores, more commonly referred to as insurance scores, are used by insurance companies to determine how risky a person is and how much that person will have to pay for their insurance. The use of these insurance scores has made headlines in recent years because many people consider their use to be very controversial. As a result of the publicity that this practice has received, most people now know that insurance companies are using credit information but there are a lot of misconceptions about this practice.
The biggest misconception that people have is that it is their credit score that is being used by the insurance companies. That is not the case. Insurance scores and traditional credit scores are very different. A credit score is a tool that a lender would use. It uses information in a person’s credit report to generate a number that tells the lender how likely a customer is to successfully repay a debt if they were to be lent money. The higher the score, the less risky a person is and the more likely they are to repay a loan. An insurance score, on the other hand, is a tool that an insurance company would use to predict how likely a person is to have a claim on their homeowner’s or auto insurance. Much of the same information is used to calculate an insurance score but the score is intended to predict an entirely different thing. Everybody has both an insurance score and a credit score and the two scores can be very different.
Another misconception is that if a person pays their bills on time that they will have an excellent insurance score. The truth is that paying your bills on time only gets you so far. For a credit score a good payment history usually guarantees that a person will have an excellent score. However it is much less important in an insurance score. Only 30 to 40% of an insurance score is made up of a person’s payment history. The remainder is calculated from the types of accounts a person has, the balances that a person carries, and the number of times that a credit report has been pulled recently.
The other major misconception is that an insurance score cannot be changed. It is possible to improve an insurance score significantly by closing certain types of accounts, spreading balances over accounts appropriately, and by opening favorable types of accounts. However, before a person attempts to manipulate information on their credit report they should consult the help of a professional. Since insurance scores and credit scores are different it is possible that making a change on a credit report will positively impact one score while lowering the other. Companies such as www.InsuranceScore.net are good places to go for information about insurance scores and they usually offer a complete service to improve a score in a safe and effective manner.
It pays to be educated about insurance scores, how they work and to take steps to improve a score. With many insurance companies a person with a good insurance score pays up to 54% less for their insurance than a person with a poor score.