What Is a Credit-Based Insurance Score?

What Is a Credit-Based Insurance Score?

Credit-based insurance scores use your credit history to try to predict whether you will file claims that result in an insurance company losing money. Insurance companies might use these scores when reviewing new insurance applications or renewing customers' policies for auto, home and life insurance.

Insurance companies generally can't deny you insurance based solely on your credit-based insurance score, but your score might be a factor in your ability to get or renew your policy or in the rates you pay.

Credit-Based Insurance Scores vs. Credit Scores

There are several similarities and differences between credit-based insurance scores and consumer credit scores.

Similarities

• Competing companies create scores: Several companies, including FICO and VantageScore^®, create versions of credit scores for creditors. Similarly, FICO, LexisNexis and TransUnion create credit-based insurance scores for insurance companies.
• Your scores primarily depend on your credit report: Many credit risk scores and credit-based insurance scores only consider the information from one of your credit reports.
• The scores rank consumers: Both types of scores may rank consumers based on what the score is trying to predict—the likelihood of missing a payment or filing an insurance claim. A specific score isn't necessarily good or bad. It's up to the lender or insurance company to decide how it wants to use that information to make a decision.
• Reason codes explain your score: When a company takes an adverse action based on your credit data, such as denying an application, increasing your interest rate or charging you a higher premium, it may send you an adverse action letter. These letters may contain several reason codes that tell you why your credit-based insurance score or credit score wasn't higher.

Differences

• What the scores predict: Credit-based insurance scores try to predict whether a consumer will file claims that cost the insurance company more than the company earns from premiums. Credit scores try to predict the likelihood that a consumer will be 90 or more days late on a credit payment in the next 24 months.
• The score ranges: Most types of FICO and VantageScore credit scores range from 300 to 850. However, credit-based insurance scores might have different score ranges.
• Access to scores: You can easily check your credit scores—Experian even gives you access to one of your FICO^® Scores^☉ for free. However, to check your credit-based insurance score, you might need to apply for a new policy or ask an insurance agent if they can show you one of your scores.

Which States Use Credit-Based Insurance Scores?

Most states allow insurance companies to consider a credit-based insurance score when determining whether to approve a new policy, renew a policy and how much to charge. However, the score generally can't be the only factor in the decision.

Several states also have stricter limits or forbid companies from using credit-based insurance scores altogether.

Other Factors Used to Calculate Insurance Rates

Even when insurance companies can use credit-based insurance scores, they generally have to—and want to—consider other factors when determining your eligibility and premiums. Specifics can depend on the company and the type of insurance, but common factors that affect auto and homeowners insurance rates include:

• Deductibles: A deductible is how much you'll pay before your insurance covers a claim. A higher deductible will generally lead to lower rates.
• Coverage limits: The maximum amount that the insurance company will pay for each claim. These limits can vary depending on the type of claim, and higher limits generally lead to higher premiums.
• Types of coverage: Some policies may have different types of coverage, such as liability, collision and comprehensive coverage on an auto policy. More coverage comes with higher rates.
• Location: Where you live can affect auto and homeowners rates as weather, crime and other types of risks can correlate with location.
• Specific characteristics: The type of vehicle you drive, the type of roof your home has and other items specific to the vehicle or home could raise or lower your rates.
• Claims history: Your history of filing insurance claims can also affect your rates. LexisNexis, which creates a credit-based insurance score, also manages the CLUE (Comprehensive Loss Underwriting Exchange) database and creates reports with auto and homeowners insurance claim histories. You can request a free copy of your report once every 12 months from LexisNexis.
• Discounts: Many insurance companies also offer various discounts, such as a lower rate if you bundle multiple policies or install a security system in your car or home.

Insurance companies may consider and weight factors differently, which is one reason that shopping for insurance can sometimes help you find a lower-cost plan.

How to Improve Your Credit-Based Insurance Score

The underlying information in your credit report can affect your credit-based insurance scores and other types of credit scores. You might be able to improve all these scores if you:

1. Pay your bills on time. Late payments, past-due accounts, collection accounts and filing for bankruptcy could all hurt your credit-based insurance scores. However, having a long history of paying bills on time could help them.
2. Pay down loans and credit card balances. Low loan balances and a low credit utilization rate, the percentage of available credit you're using on credit cards, can also affect your credit scores. The number of accounts with balances also might be a factor.
3. Use revolving and installment credit. Having open installment loans and revolving credit accounts, such as credit cards, might help your scores. It's often a relatively minor factor, however, and you might not want to open a new account just to increase your credit mix.
4. Apply for credit only as needed. Don't be afraid to apply for a loan or credit card when you need to borrow money or find a great offer. However, new credit applications may lead to hard credit inquiries, which could hurt your credit scores. Applying for insurance policies and getting preapproved for credit accounts leads to soft inquiries, which don't affect your credit scores.

Your history with credit, measured by the ages of your oldest and newest credit accounts, and the average age of all your credit accounts, can also affect your scores. Opening a new account might affect some of these factors immediately. However, paid-off and closed accounts can continue affecting these age-related factors until they fall off your credit reports, seven to ten years later.

How to Lower Your Rates if You Have Poor Credit

Even if you have poor credit, you may be able to lower your insurance rates by focusing on the other factors that can affect your rates:

• Increase your policy's deductibles
• Lower your policy's coverage limits
• Remove optional coverage from your policy
• Avoid filing claims if you won't receive a lot of money or can pay for repairs outright
• Bundle multiple policies from one insurance company
• Purchase security systems that will give you a discount
• Ask about classes, programs or other ways to get discounts

Although you can't control all the factors that affect your insurance rates, you can use these ideas to try to lower your premiums or save on a new policy.

Check Your Credit and Compare Insurance Quotes

Checking and monitoring your credit report can help you keep an eye on the underlying information that affects your credit-based insurance scores and credit scores. Even if you live in a state where insurance companies can't consider your credit history, good credit can be important when you want to get a loan or credit card, rent a home or apply for a job.

In addition to giving you access to your free credit report and score, Experian members can use the auto insurance comparison feature to get quotes from multiple insurance companies. This can save you time when shopping around for coverage.