Credit Sesame on insurance credit score. How and why do insurance companies check your credit score?
In most states, it’s legal for insurance companies to check your credit score when you apply for coverage. And 95% of them do. It’s a practice called credit-based insurance scoring, and many insurers believe that a consumer’s insurance credit score predicts how likely they are to file a home or auto insurance claim.
What is an insurance credit score?
Insurers don’t pull the same report that banks or credit card companies see. Instead, they use a special insurance credit score to decide whether to underwrite your policy. This means they decide if they’re willing to insure you and to rate your policy. Rating your policy means determining how much your policy will cost,
While most types of credit scores run between 300 and 850, the commonly used LexisNexis Attract insurance score ranges from 200 to 997. FICO doesn’t list its credit-based insurance score range. FICO® insurance scores are not available to consumers, but you can request a report with your score from Lexis-Nexis. You may also be able to access a seven-year claims history report for free once every 12 months at LexisNexis.
Do credit scores really predict insurance claims?
Is it fair for insurers to use your credit score when determining your premium or deciding to insure you? According to the Insurance Information Institute, many researchers have studied insurance claims and credit scores and found a clear relationship between lower credit scores and higher numbers of claims.
In addition, the Federal Trade Commission (FTC) has reported to Congress that multiple studies since FICO created the system in the 1990s have confirmed “a strong relationship between credit-based insurance scores and the frequency with which claims were made, as well as between scores and the total dollar amount insurance companies paid on these claims.” In short, studies have repeatedly concluded that insurance credit scores predict how risky a consumer would be to insure. Therefore, most states allow insurance companies to use this information to set rates.
Some critics have expressed concern about the use of credit-based scores in rating home and car insurance policies. The knock on credit scoring is that it creates “proxy discrimination” against people of color — for instance, causing them to pay more for homeowners insurance than their neighbors with the same coverage requirements.
On the other hand, the FTC wrote in its July 2007 report, “Credit-Based Insurance Scores:
Impacts on Consumers of Automobile Insurance,” “Credit-based insurance scores appear to have little effect as a ‘proxy’ for membership in racial and ethnic groups in decisions related to insurance. …Tests also showed that scores predict insurance risk within racial and ethnic minority groups. …This within-group effect of scores is inconsistent with the theory that scores are solely a proxy for race and ethnicity.”
Which states allow credit-based insurance scoring?
The National Association of Insurance Commissioners (NIAC) says that most states don’t allow credit-based insurance scores to be “the sole basis” for insurance rating or underwriting decisions. Some states require insurers to notify you if your credit score has caused an adverse decision.
As of November 2022, California, Hawaii, Maryland, Michigan, and Massachusetts ban or limit the use of credit scores in determining policy rates. As of March 2022, Washington State prohibited insurance companies from using credit scores to set policy rates on auto, homeowners, and renter’s insurance through March of 2025. This was to combat the effect that COVID had on credit ratings throughout the state.
Other states, such as Oregon and Utah, allow insurers to use credit information when underwriting a new customer. However, credit can’t be the only factor in the decision and it can’t be used to cancel your policy once you’re a customer.
Insurance credit score factors
Your “insurance credit score” from FICO incorporates five general areas to predict how well you manage and limit risk. Here are those factors and the weight they get in your credit-based insurance score:
- Payment history
- How you make payments on credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.
- Negative credit events like missed payments, bankruptcies, collections and charge-offs
- Delinquency level (months past due)
- Past-due and collection amounts
- How much time has passed since a negative credit event (they become less important over time)
- Number of past due accounts
- Number of accounts paid as agreed
- Amounts owed
- Total amount owed on all accounts
- Amounts owed on types of accounts (credit cards, auto loans, etc.)
- Number of accounts with balances
- Credit utilization (percentage of revolving credit used)
- Remaining balances on installment loans (percentage of installment loans still owed)
- Length of credit history
- Age of oldest account
- Average age of accounts
- Age of oldest account, by type of account
- Time since accounts opened
- New credit/inquiries
- Number of recently opened accounts, and percentage of accounts that are recently opened
- Number of recent “hard” credit inquiries (when you apply for credit)
- Time since recent account opening(s)
- Time since hard credit inquiries
- Credit mix
- Activity on various types of accounts (credit cards, retail accounts, installment loans, mortgages, auto loans, etc.)
FICO says that no single piece of credit information or factor alone determines your score.
- A score takes into consideration all the above categories of information, not just one or two.
- Weighting of the factors listed above varies and depends on the overall information in your credit report. This means that a given factor may be more important for you than for someone else with a different credit history.
- As the information in your credit report changes, so does the importance of any factor in determining your score. Therefore, it’s impossible to say exactly how important any single factor is in determining your score.
- The levels of importance shown here are for the general population and vary according to your exact credit profile. And the combination of information varies from person to person and also for any individual over time.
The FICO Insurance Score only considers your credit report. Insurers also review your past claims history, driving record (for auto insurance), property inspection (for homeowners insurance), the type of auto/home, and the value of whatever you are insuring.
Again, the weighting of the factors above is for the general population. It’s a starting point; then weighting is tweaked based on the credit profile. For some profiles — for example, consumers with limited credit history — the weighting of these categories may be a little different.
What’s a good insurance credit score?
Many insurance sites state that a good insurance credit score is 750 or higher. Here is how the LexisNexis tiers shape up, according to the Connecticut Insurance Exchange:
- Excellent: 776-997
- Good (Average): 626-775
- Fair (Below Average): 501-625
- Poor: Under 500
You can increase your insurance credit score by reducing debt and making your payments on time (within 30 days of your due date). You can’t magically lengthen your credit history, and your credit mix is not that important, so those are the most obvious ways of improving.
How much does your credit score affect your insurance premium?
Your credit probably has a much greater effect on what you pay for insurance than you believe. According to consumer advocates at United Policyholders, your credit history is likely to have more impact on your premium than any other factor. In fact, says the organization, “a consumer with the worst credit score – everything else equal – can pay two, three or four times as much as a consumer with the best credit score.” And a driver with a clean record may pay more than a driver with an accident or violation solely because of credit history.
According to data from Quadrant Information Services, these are the average annual full coverage auto insurance premiums in the United States by credit tier:
- Excellent credit: $1,556
- Good credit: $1,771
- Average credit: $1,907
- Poor credit: $3,002
If your insurance score is less than excellent, improving it could save you hundreds or even thousands every year on your policies. Checking and monitoring your credit score (for free right here at Credit Sesame) is a great way to see where you can improve and begin to pay less for insurance.
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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.