What Are Credit-Based Insurance Scores?

When you buy insurance, your premiums are impacted by a number of factors such as your driving record, your age and the level of coverage that you select. A factor that can play just as big of a role in your insurance premiums is your credit score. Insurance companies use a special credit-based insurance score to help calculate your premiums.

Credit History and Insurance

Those unfamiliar with the insurance industry may not know why credit scores have anything to do with insurance. Many insurance companies believe that there is a direct correlation between a poor credit history and the likelihood that you will file an insurance claim. Those who have high credit scores file fewer insurance claims. Because of this correlation, insurance companies charge you less in premiums if you have a high credit score. Insurance companies use a score that they calculate instead of the one that you see on your credit report.

Components of Insurance Score

Your insurance credit score is made up of several variables. One of the most important variables is your previous credit performance. This is also known as payment history and it looks at how well you pay your bills. The amount of debt that you have is another important factor when calculating your score. The insurance company also looks at the length of your credit history and what types of credit you have access to and use.

Changes in Premiums

Once you buy your insurance and have a specific premium payment, this does not necessarily mean that your premium is set in stone. In fact, many insurance companies regularly change their customers' premiums when they experience a major change in their credit histories. If you go through something that negatively affects your credit, such as a bankruptcy, you may have to deal with an increase in insurance premiums. This could affect your auto, home and other insurance premiums.

Lowering Your Premiums

If your insurance premiums are higher than you would like to pay, you do not have to simply live with them. You can take the necessary steps to improve your credit and lower your insurance premiums. This will not happen overnight, but you can make a difference over a period of a few months or years. For example, if you pay down your debt and make it a priority to always make your payments on time, you can significantly improve your credit score.