How Does Credit Score Impact Your Insurance Premiums?

Credit scores reflect an individual's financial behaviour and reliability. In India, while insurance companies traditionally assess risk through driving or health records, claims history, vehicle details, health profile, etc., the role of credit scores is gradually gaining importance in determining insurance premiums. A credit score may indicate risk levels to insurers and influence the cost of your insurance policy.

This article explores the relationship between credit scores and insurance premiums and how credit impacts your costs. It also provides ways to improve your credit profile to lower premiums, offering practical insights for Indian consumers.

Insurance companies aim to manage risk effectively. Traditionally, factors like driving history and vehicle specifics have dominated premium calculations for auto insurance. The same goes for medical records and past hospitalisation determine health claims. However, insurers are also increasingly using credit scores as a predictive tool for risk assessment. 

Research indicates a correlation between a person’s credit behaviour and the likelihood of filing insurance claims. This link helps insurers forecast future claims more accurately and set premiums accordingly. 

The influence of credit score on insurance mainly revolves around these two points: 

• Credit Reflects Financial Responsibility: A strong credit score suggests timely bill payments and financial discipline, which insurers interpret as a lower risk for policy defaults or potential fraud. 

• Credit-based Insurance Scores: These are specialised scores derived from credit report data, specifically designed by insurers to predict claim probabilities, differing slightly from traditional credit scores used for loans. 

For example, a policyholder with a credit score above 750 may be viewed as financially reliable, thereby qualifying for discounted premiums. In contrast, someone with a score below 650 might be charged higher premiums, reflecting a perceived higher risk. Such differentiation incentivises good credit conduct, potentially reducing overall insurance costs.

Here’s where the primary influence of credit score can be seen on insurance premiums: 

• Premium Pricing: Insurers may offer lower premium rates to individuals with higher credit scores due to their lower statistical claim risk. Conversely, individuals with poor credit may face higher premiums as insurers consider them more likely to default or file claims. 

• Eligibility and Policy Terms: Some insurers may restrict or adjust coverage options based on credit assessments, impacting policy affordability and availability.

For example, a homeowner with a credit score of 750 might receive premium discounts of 10-20% compared to a peer with a 650 credit score. The insurer perceives the higher score as a trustworthy and less risky client, justifying favourable premiums. This behaviour aligns with the insurer’s objective to ensure profitability while rewarding financially responsible clients. 

Additionally, here are two more points you should keep in mind: 

• Higher credit scores are often linked with better payment consistency, reducing insurer risks of policy lapse due to non-payment. 

• Creditworthiness can also influence renewal terms and policy adjustments, with lower risk clients enjoying smoother renewals.

Improving your credit score can enhance your chance of securing better insurance premiums. Here’s how: 

• Timely Payments: Ensure all EMIs, credit card dues, and bills are paid punctually. Payment history is a significant factor affecting credit scores and insurers’ risk perceptions. 

• Manage Debt Levels: Maintain a healthy credit utilisation ratio, ideally below 30%. Lower debt levels signal good financial management to credit agencies and insurance firms. 

• Monitor Credit Reports: Regularly check your credit report for errors or inaccuracies, and dispute them promptly to maintain an accurate score. 

• Avoid Excessive Credit Applications: Applying for multiple new credits within a short period can lower your score due to numerous hard inquiries. 

• Maintain Old Accounts: A longer credit history generally improves credit scores, so keep longstanding accounts active and in good standing. 

For example, an individual who starts paying all bills on time and reduces credit card balances from 80% utilisation to below 30% may see their credit score rise from 580 to 720 within a year. As a result, they might qualify for 15-25% lower insurance premiums in their next policy renewal, as it reflects reduced insurer risk.

While credit scores are not yet the sole factor shaping insurance premiums in India, their importance is growing. A healthy credit score signals good financial behaviour, which insurers tend to reward with lower premiums and better policy terms. Consumers can benefit from understanding this dynamic and actively improving their credit health. By doing so, they may reduce insurance costs while gaining access to more favourable coverage options. Regular credit management is thus a prudent step for anyone seeking affordable insurance.