When it comes to the cost of your business insurance policy, multiple factors play a role. From the type of vehicle you use to the number of drivers on your policy, every detail counts. But one factor that often catches business owners by surprise is how their credit score can influence their business insurance rates. While credit scores are typically associated with personal finance, they can significantly impact insurance premiums on the business side. Let’s explore how credit scores work to understand how they can impact your insurance rates.
Credit Score vs. Insurance Score
To understand how credit scores affect your business insurance rates, it’s essential to know why and how insurance companies use your credit information. While insurance companies don’t directly use your credit score, they do examine specific details from your credit report to calculate an “insurance score”. This score helps insurers predict your risk, set your premium, and make coverage decisions. Let’s take a closer look at the purposes of credit and insurance scores and how they differ:
- Credit Score: This score measures an individual’s or business’s creditworthiness. It’s primarily used by lenders, such as banks and credit card companies, to assess the likelihood that a borrower will repay a loan. Credit scores usually range from 300 to 850, with higher scores indicating better creditworthiness.
- Insurance Score: An insurance score is a number that insurance companies use to assess the likelihood of a policyholder filing a claim. Instead of focusing on repayment behavior, insurance scores help insurance companies set premium rates and decide on coverage.
As you can see, while insurance scores draw on information from your credit report, insurance companies focus on assessing risk specifically for insurance purposes – not for financial lending.
| Feature | Insurance Score | Credit Score |
|---|---|---|
| Purpose | Predicts the likelihood of filing a claim | Assesses creditworthiness and ability to repay debt |
| Used By | Insurance companies | Lenders, banks, credit card companies |
| Factors Considered | Payment history, claims history, driving record, type of insurance, business operations | Payment history, credit utilization, length of credit history, types of credit, new credit inquiries |
| Impact on Insurance | Lower score can lead to higher premiums of denial of coverage | Lower scores can lead to higher interest rates or denial of credit |
| Regulation | Regulated at the state level | Regulated at the federal level |
How Your Insurance Score is Calculated
Insurance scores are calculated using specific factors from your credit report. These factors are relevant to insurance companies when assessing your risk level. Here’s what your business insurance company might look at:
- Payment History: Your consistency in making timely payments on debts.
- Outstanding Debt: The current amount of debt your business carries.
- Credit History Length: The duration of your established credit history.
- Recent Credit Inquiries: The frequency of recent credit applications.
- Credit Mix: The diversity of your credit accounts (e.g., credit cards, loans).
Certain factors in your credit report, like income, available credit, and personal information, are not included in your insurance score calculations. Additionally, some states have regulations limiting what insurers can consider. In fact, states like California, Hawaii, Massachusetts, and Michigan, restrict or limit insurance companies from using credit scores when determining rates. Remember, your credit-based insurance score is just one piece of the puzzle. Insurance companies use a combination of factors, including your business’s industry, size, and claim history, to assess your overall risk and determine your insurance rates.
Why Credit Scores Matter in Business Insurance
Insurance companies use credit scores to gain insight into your financial habits. A solid credit history, showing responsible debt management and on-time payments, can lead to more favorable insurance rates. In contrast, a poor credit history – marked by missed payments, defaults, or bankruptcies – may increase your insurance costs. Although factors like business size, industry, and claims history also impact rates, a strong credit score is an asset that can help secure better terms depending on what state you operate in. Understanding what affects your insurance score allows you to focus on the areas that most influence your business insurance rates. Lower scores, for example, can potentially add hundreds of dollars to your annual premiums.
Strategies to Improve Your Credit Score
While credit score isn’t the only factor affecting business insurance premiums, improving it can make a significant difference. Here are some actionable strategies:
- Monitor Your Credit Reports Regularly: Review your credit reports from all three major bureaus annually to check for errors, as inaccuracies can harm your score. Also, manage your credit utilization by keeping credit card balances low; this improves your credit utilization ratio, which is the percentage of credit you’re using compared to your total credit limit.
- Pay Bills on Time: Consistently making timely payments on all credit accounts such as credit cards, loans, and utility bills can improve your score. Setting up automatic payments is a helpful way to avoid late fees and ensure payments are always on time.
- Limit New Credit Applications: Avoid unnecessary credit inquiries, as each application for new credit creates a hard inquiry on your report, which can temporarily lower your score. If possible, consolidate multiple debts into a single loan to reduce the number of open credit accounts.
- Consider a Credit-Based Insurance Score: Shop around, as different insurance companies may weigh credit scores differently when setting rates. Additionally, consider bundling your business auto insurance with other policies, like commercial property insurance, which can sometimes result in discounts.
Will Shopping for Insurance Hurt My Credit Score?
Shopping around for insurance quotes won’t negatively impact your credit score. Insurance companies typically conduct “soft inquiries” when you request quotes. Unlike “hard inquiries” (which can affect your credit score), soft inquiries are invisible to lenders and won’t harm your creditworthiness. Just like your traditional credit report, you have the right to review your insurance credit report for accuracy. If you find any errors, you can dispute them using similar methods as you would for a traditional credit report. To obtain a copy of your insurance credit report, visit the Annual Credit Report from the Federal Trade Commission (FTC).
Get an Insurance Quote from AIS
If you’re ready to explore your business insurance options and discuss how your credit score might affect your rates, give us a call today at (888) 772-4247. Our specialists can also provide you with a tailored commercial insurance quote to ensure you have the necessary coverage to protect your business.
The information in this article is obtained from various sources and offered for educational purposes only. Furthermore, it should not replace the advice of a qualified professional. The definitions, terms, and coverage in a given policy may differ from those suggested here. No warranty or appropriateness for a specific purpose is expressed or implied.
