A credit score is a financial metric that you’re probably already familiar with. It’s a three-digit number that ranks your creditworthiness and your history of repaying debts in a timely manner. But perhaps you haven’t heard of a credit-based insurance score.
A credit-based insurance score is a metric similar to a credit score. However, instead of being used by banks and credit card providers, your credit-based insurance score is used by insurers to determine how likely you are to file a claim.
In this article, we’ll take an in-depth look at the difference between a credit-based insurance score and a credit score. Read from start to finish to learn all about why insurance credit scores are important, how they’re calculated, and how you can improve yours. Or, skip to any section using the links below.
- What Is a Credit-Based Insurance Score?
- How Is an Insurance Score Determined?
- What Is the Ideal Insurance Score Range?
- Difference Between Credit-Based Insurance Score vs. Credit Score
- How Can I Check My Insurance Credit Score?
- How Can I Improve My Credit Score?
- How Do I Manage My Credit-Based Insurance Score?
- Does Getting a Car Insurance Quote Affect My Credit Score?
- How Do I Save on Car Insurance?
- Start Improving Your Credit Today
What Is a Credit-Based Insurance Score?
According to NAIC.org, a credit-based insurance score is used by insurance companies to determine how likely an individual is to file a claim under their policy. Similar to a traditional credit score, your insurance credit score is based on key financial data points, such as credit history and outstanding debt. Insurance companies use your credit-based insurance score, along with a variety of other factors, to determine the financial risk you pose to them and set a rate that aligns with that risk.
How Does a Credit-Based Insurance Score Work?
Credit-based insurance scores are one tool that insurance companies use when underwriting an individual’s insurance policy. A good insurance credit score can lead to a lower rate, while a poor insurance credit score will likely result in a higher rate.
Insurance credit scores can range from 200 to 997, with the higher number being the better score. Insurers and data analytics companies can determine your score by taking a look at relevant financial data. They’ll consider how much debt you have, whether you’ve paid your debts on time, and how long you’ve had a line of credit for, among other factors. Each financial data category is weighted differently, and thus has a different impact on your credit-based insurance score.
Many insurance companies use insurance credit scores when underwriting policies. According to FICO, 95% of private insurers now use credit-based insurance claims. However, the practice has been subject to controversy, with some arguing that credit-based insurance scores disproportionately impact vulnerable groups. While it remains legal in most of the United States, the states of California, Hawaii, Maryland, Massachusetts, and Michigan don’t allow insurers to use credit-based insurance scores—or limit how they use them—to set rates.
How Is an Insurance Score Determined?
To calculate an insurance score, insurance companies consider different categories of financial data. Each category is given a certain weight that affects how much of an impact it’ll have on the overall insurance score. FICO, a leading data analytics company, gives the following weights to these five categories of financial information:
- Previous credit performance (40%): The biggest determining factor in your insurance score is how well you keep up with payments and avoid delinquencies.
- Current level of indebtedness (30%): The amount of debt you currently owe.
- Length of credit history (15%): The length of time since you first opened a line of credit.
- Pursuit of new credit (10%): The number of recently opened accounts in your name.
- Credit mix (5%): The types of credit accounts you currently have, ranging from credit cards to a mortgage and more.
With this model in mind, there are a variety of things that can impact your insurance score. Making late payments on debts, lacking credit history, and having a high credit utilization rate can all negatively affect your insurance score. On the other hand, making timely payments, having a long credit history, and maintaining low credit utilization can positively affect your insurance score.
After evaluating each of these five categories, FICO or a similar company will issue your insurance score in the form of a three-digit number. Overall, your credit-based insurance score can range from 200 to 997. The higher the score, the better.
Can a Credit-Based Insurance Score Use My Personal Information to Determine My Score?
Insurers and data analytics firms are not allowed to use personal information to determine your credit-based insurance score. This means that the following information will not be considered when calculating your insurance score:
- Race, ethnicity, or nationality
- Marital status
- Income level, occupation, or employment history
- Area of residency
- Your participation in credit counseling
- Family financial obligations such as child support or alimony
- Rental agreements
- Requests marked as coming from employers
- Any information not included in your credit report
Only credit-related information is considered when calculating your credit-based insurance score in order to prevent prejudice or unfair treatment. By omitting the above information, insurance scores can be more objective and standardized.
What Is the Ideal Insurance Score Range?
As we mentioned above, credit-based insurance scores range from a low of 200 to a high of 997. A few people fall into either extreme of this range, but, in general, most people sit somewhere in the middle. As far as an ideal insurance score, the simple answer is that you should try to get it as high as possible. If you have a high insurance credit score, most insurers will offer you better rates.
Here’s how different ranges of insurance scores are rated, from poor to good:
- Poor: Under 500
- Below average: 501 to 625
- Average: 626 to 775
- Good: 776 to 997
For the best rates, you would generally want to fall into the “Good” category, which ranges from 776 to 997. However, you should keep in mind that these ranges are loosely defined. What one insurer considers a good insurance score may be viewed differently by another.
Difference Between Credit-Based Insurance Score vs Credit Score
An insurance-based credit score isn’t the same thing as the credit score that’s checked when you apply for housing, credit cards, and loans. While the same financial categories are generally used to calculate both scores, they’re weighted differently in each case. A traditional credit score also typically falls into a range between 300 and 850.
Aside from how they’re calculated, another thing that sets these credit scores apart is how they’re used. A credit-based insurance score is used by insurers to predict your likelihood of filing a claim, while a credit score tends to indicate how likely you are to pay your debts on time.
In the areas where it’s used, a credit score can hold a lot of weight. Many landlords set a minimum credit score you have to meet to apply for an apartment, and a low credit score may disqualify you from advantageous loans. However, an insurance credit score is just one part of the underwriting process. Insurers typically consider your insurance credit score along with other pieces of information, such as a claims history report and motor vehicle report.
How Can I Check My Insurance Credit Score?
You can check your insurance credit score by going to the same analytics companies that insurers purchase their information from. One of the leading companies in this area is called LexisNexis, which works with insurance companies to assess risk and determine rates. You can go to their website and request a free Consumer Disclosure Report to gain access to data concerning your real estate transactions, bankruptcy records, past addresses, lien statuses, and more.
How Can I Improve My Credit Score?
There are a variety of ways to improve your credit score:
- Always make payments on time: It’s important to responsibly manage your credit and stay on top of your finances. Paying all of your bills by the specified due dates can improve your credit score over time.
- Keep your credit utilization to 30% or less: Your credit utilization rate is the amount of credit you’re using compared to the total credit available to you. A low credit utilization rate will have a positive impact on your credit score.
- Limit new credit inquiries: Hard credit inquiries can negatively impact your credit score. Avoid racking up a high number of credit inquiries over a short period of time.
- Ask for a credit limit increase: Increasing your credit limit can lower your credit utilization rate. Consider speaking with your lender about the possibility of increasing your credit limit.
How Do I Manage My Credit-Based Insurance Score?
You can manage your credit-based insurance score by taking care of your finances and following the steps listed in the section above. As long as you maintain a line of credit, keep your credit utilization rate low, and pay your bills on time, you should be able to keep your insurance score in check.
Keep in mind that your credit-based insurance score is only part of the equation when it comes to calculating your rates. When it comes to auto insurance, for instance, another big part of the underwriting process is your driving record. By maintaining a clean driving record and conducting proper upkeep on your vehicle, you can potentially cash in on lower rates.
Does Getting a Car Insurance Quote Affect My Credit Score?
How are your car insurance and credit score related? When you get a car insurance quote, the insurance company may request your credit-based insurance score. However, getting a car insurance quote will not affect your credit score. This is known as a soft inquiry, and it’s not included on your credit report.
How Do I Save on Car Insurance?
Access lower car insurance rates by following these tips:
- Search for savings: Shop around and compare rates from different insurers to see where you can get the best deal.
- Drive safely: Accruing traffic tickets or causing accidents can cause your car insurance premiums to go up, so be careful while driving.
- Improve your credit score: As we mentioned earlier, most private insurance companies use credit-based insurance scores to set rates. By improving your credit score, you can save on car insurance.
- Pay for the whole year up front: Many insurers offer discounts if you pay for an insurance policy upfront rather than in monthly installments.
Start Improving Your Credit Today
A good credit score can open up a lot of financial opportunities in your life, while bad credit can limit your options. You can access loans with lower interest rates, open up credit cards with great perks, and apply to a wider range of rental properties. And, when it comes to insurance, your credit-based insurance score can impact your rates.
With this in mind, it’s important to stay on top of your credit score. Use the Mint app to access a free credit report in a matter of minutes, whenever and wherever. With Mint, you can better understand your credit score and create a plan for improving it.