Is Insurance Based on Credit Scores?

20-Sep-2017 written by : FSI-Team

The cost of products like insurance and loans is greatly affected by risks. This is because a person with a poor financial condition is more likely to default than a person who has a high income. Similarly, if a person has a history of making late payments then also they are more likely to default than others.

Banks consider factors like these when going through loan applications. However, lately, insurance companies have also started using a person's CIBIL score as a benchmark to predict their premium payment pattern.

The Rise of Insurance Score

A person's credit score can tell a lot about their personality. Insurance companies realized this and started referring to the same when calculating appropriate insurance premiums for the people who buy insurance products. And so, just like CIBIL score, insurance score was created.

Can an Insurance Plan be Based on Credit score?

Yes, your insurance plan, especially the premium amount can be affected by your credit score. The following are some of the reasons why:

Payment History and Health

If a person has a long history of late payments, it could suggest financial problems which affect their mental and physical health. So, a health insurance provider may raise the premium costs of a health insurance assuming a higher risk than average.

Another point that can put a dent in your insurance application is a low CIBIL score on the account of loan defaulting. If you recently defaulted on a loan, then it could give the insurer a reason to think that it took a toll on your health too, which is why they could think of increasing the premium costs.

High utilization

One of the basic factors that make up a credit score is the credit utilization. It's the ratio of the credit you use against the total credit that's available to you.

A high credit utilization can suggest an irresponsible behavior. Or in other words- a person who is not is able to handle their money well is also unlikely to take care of their health too. So, if your credit report shows a high utilization ratio, it can affect your insurance premium.

Good Score Equals Good Premium

It's not hard to imagine that a person who pays their bills on time, uses credit cards within limits, and is able to manage multiple loans well is likely to have their life under control. With this logic, it's also likely that they will live longer than others who have a low CIBIL score.

So, if you have a high credit score, it's easier to get attractive insurance products at low premium costs.

What do you do if you have a poor score?

If you have an excellent credit score, then you don't have to worry about a thing. However, if that's not the case, then you can make improvements by taking a few steps, such as:

  • Make a habit of paying your bills on time. Whether it's the credit card bills or loan EMIs, be sure to pay them in full and on time. Compromise some luxuries if you have to but don't let anything affect your payment schedule. This is the most important step to building a good score.
  • Use your credit cards responsibly and keep your credit utilization below 35%. So, if your credit card limit is Rs. 2 lakhs, then the maximum you should spend with it has to be below Rs. 70,000 a month.
  • Start monitoring your credit report. A lot of times a poor credit score is a result of mistakes or errors in the credit report. So, you can check yours every few months so that if you detect a discrepancy or mistake you can have it corrected.

A good insurance coverage can save you from all kinds of financial problems should a medical emergency emerge in the future. So, if you have not been careful until now, you can still start over and make progress. Just follow the steps given above and with time you can make a considerable improvement.



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