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Everything You Need to Know About Credit-Based Insurance Scores

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A credit-based insurance score isn’t the same as a credit score. So what is it? How can it impact the insurance rates for your business?

What is in a Credit-Based Insurance Score?

Many business owners are unaware that their business insurance rate is affected by their credit-based insurance scores.

According to the NAIC, “95% of auto insurers and 85% of homeowners' insurers use credit-based insurance scores in states where it is a legally allowed underwriting or risk classification factor.”

Why do insurance companies care about your credit-based insurance score? Statistics show that people who have high credit scores file fewer claims than those with low credit scores. Secondly, those with higher scores are less likely to have traffic accidents and traffic violations. Additionally, much of the history provided in credit reports can be indicative of whether a business will pay its business insurance premiums on time or at all.

For that reason, federal law allows insurance companies to look at credit report information to calculate your insurance scores—and predict the likelihood of future claims. Business insurance companies do not have to notify you that they are utilizing your credit report, so most of the time, you won't even realize it. A credit-based insurance score is simply their way of calculating your likelihood of a claim.

If they calculate that you are more likely to incur and submit claims, they typically offset the cost by charging you higher premiums for your insurance.

How a Business Credit-Based Insurance Score Is Used

Business insurance rates are based on a narrow set of information that is available on your credit report and business insurance companies are allowed to use only those specific types of information from your credit report. These items are collectively known as your "Credit-based insurance score" Just like your credit score, a credit-based insurance score is reported as a 3-digit number.

Credit-based insurance scores do not include the number that banks or mortgage companies use, which is known as your FICO score. Although your insurance scores are different from your traditional FICO score, it usually follows the same trend. In other words, if your FICO score is high, your credit-based insurance score will usually be high. 

What usually impacts your credit score?

  • Your monthly bill payment history (40%)
  • Whether or not you have outstanding debt (30%)
  • Length of credit history (15%)
  • The types of credit cards you have (5%)

If you've missed credit card payments or defaulted on debts, insurance companies are unsure of whether you will pay them or not. Bankruptcy is going to cause a serious "ding" on your insurance credit report information, resulting in higher business insurance rates. The business insurance rate will, however, be adjusted once the bankruptcy "drops off" of your report, usually seven years after it was discharged.

It is important to note that under the law, your business insurance rates cannot increase if you do not have enough credit history to calculate credit information. Secondly, they cannot use personal information such as race, gender, religion, etc. to calculate your insurance rates. 

All of this being said, credit-based insurance scores are one piece of the puzzle that is used to calculate your insurance rates. 

How to Look Up Your Insurance Credit Score

According to The Fair and Accurate Credit Transaction Act of 2003 (FACT Act), an individual is allowed a free credit report every 12 months from Equifax, Experian, and TransUnion. If you’re looking for another option, True Credit—a division of TransUnion—offers all three reports as well as monthly credit monitoring. 

You will want to review your insurance credit report and ensure that the items included therein are correct. You must do this to get the best business insurance rate you can find. If there’s something wrong with your credit report, you can report it to any credit reporting company. 

More on Specific Uses of Insurance Credit Scores for Business Insurance

When you apply for business insurance, the rates can be influenced by your insurance credit score. The insurance credit score was developed specifically for insurance purposes, and it is not the same score that a mortgage company or a car dealership would be looking at.

These are some of the things that insurance companies are NOT allowed to use when looking at your insurance credit report.

  • The amount of credit available
  • The number of credit inquiries contained in your company's credit file
  • Type of credit history or not enough credit history to develop a score
  • The types of issuers of credit cards and debit cards carried

By law, you are entitled to inspect your insurance credit report, just as you can your overall credit report. You should review it from time to time to be sure that the information there is factual. If the information there is incorrect, there are methods by which they can be corrected or updated, just as there are on the traditional credit report.

NOTE: Some states do not allow your credit-based insurance score to be used to determine premiums. Other states only allow it to be used for certain types of insurance, such as commercial property insurance or auto insurance. 

What to Do if You Have a Low Credit-Based Insurance Score

So you’ve found out that you have a low credit score. What can you do to build your credit? 

  • Begin to pay your bills on time
  • Pay off credit card debt
  • Do not carry revolving credit card balances
  • Limit hard credit inquiries (those for a loan can temporarily lower your credit score)

Have More Questions? 

If you have more questions about how your credit score will impact your premiums, give us a call. One of our agents will gladly answer any questions you may have and help you determine how to move forward. We can be reached at 877-907-5267 or by completing the form at the top of the page.

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