What is a Credit-Based Insurance Score
A credit-based insurance score is a number calculated by an insurer that predicts how likely you are to file a claim. Your auto insurance company cares about this because if you do have an accident, they want to be sure they're not going to end up paying out more money than they have to.
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A credit-based insurance score is a number calculated by an insurer that predicts how likely you are to file a claim. Your auto insurance company cares about this because if you do have an accident, they want to be sure they're not going to end up paying out more money than they have to. This number is based on the same factors as your credit score, so it's important to make sure your credit history is correct and up to date.
Higher credit scores generally mean lower premiums, while lower credit scores could lead to higher premiums or even being unable to get car insurance at all. Knowing what is in your credit report and keeping it accurate will help keep your credit-based insurance score low and save you money on car insurance. So, it's important to understand how your credit score affects your car insurance rates — and what you can do if yours isn't as high as you'd like it to be.
What Is a Credit-Based Insurance Score?
A credit-based insurance score, or insurance credit score, is a credit report-based statistic that insurance companies use to help determine rates and premiums for customers. They are designed to predict the likelihood of an insured individual filing a claim. Insurance companies argue that credit scores are a good predictor of future claims, and thus, they should be used to help set rates.
A study from 2003 found that drivers with the lowest credit scores are twice as likely to file a claim when compared to those with the highest scores. It might also shock you to learn that a poor credit score can raise your insurance premium more than a recent DUI!
Opponents of credit-based scoring argue that it unfairly penalizes low-income individuals and minorities who are more likely to have lower credit scores. They also argue that credit scores do not necessarily reflect an individual's ability to pay premiums or the likelihood of them filing a claim.
Most states use credit-based insurance scoring, but some states (California, Massachusetts, and Hawaii) have banned or restricted its use. Critics of credit-based insurance scoring continue to push for more regulation and oversight of the practice.
What Is a “Good” Insurance Credit Score?
So, what is a "good" insurance credit score? The answer to that question depends on the auto insurance company you're dealing with and the scoring model they use. However, in general, a credit score of 700 or higher is considered good.
An example of the ranges that one insurance company (LexisNexis via Experian) is from 200 to 997. A breakdown of the different ranges and their ratings are as follows:
Less desirable: Under 500
Below average: 501-625
Average: 626-775
Good: 776-997
Credit-Based Insurance Score vs. Regular Credit Score
While there are a variety of scoring models out there, most insurance companies use credit-based insurance scores. They are similar to traditional credit scores in that they take information from your credit report into account. However, there are some key differences.
For one, credit-based insurance scores specifically focus on your credit history as it relates to the insurance industry. This means that factors like any past insurance claims you've filed will be given greater weight.
Another difference is that credit scores are typically used to predict future behavior, while insurance credit scores are used to determine your current risk level. This means that a lower credit score may not always mean you'll be charged a higher rate. For example, if you have a good credit history but have been late on a couple of payments recently, your credit score may be lower than someone who has never had any late payments. However, because your credit history is still good, you may not be penalized as much as the person with the lower score.
How Credit-Based Insurance Scores Are Weighted
The credit-based insurance score was created specifically for the insurance industry and is different from the FICO or VantageScore credit score that is commonly used when a person applies for a personal loan, car loan, or mortgage. The factors that are used to calculate each score as the same; however, the various categories are weighted differently. This is because a normal credit score predicts how likely a person is to pay back a loan, whereas a credit-based insurance score calculates how likely a person is to submit an insurance claim.
As mentioned previously, your credit-based insurance score can be different between various companies, even though they will be using the same factors to determine the score. Below is an example of the category weighting that FICO uses to calculate credit-based insurance scores, according to the National Association of Insurance Commissioners (NAIC).
Payment history (40%): Payment history is how often you have made payments on time in the past.
Outstanding debt (30%): Outstanding debt includes all of your credit card balances, loans, and other debts divided by your credit limit.
Credit history length (15%): Credit history length looks at how long you have had credit accounts open and is based on the average age of all of your credit accounts.
Pursuit of new credit (10%): Pursuit of new credit looks at how many credit inquiries you have had in the past six months.
Credit mix (5%): Credit mix looks at the different types of credit that you have, such as installment loans, revolving credit (like a credit card), mortgage, and auto loans.
How Credit-Based Insurance Scores Are Used within the Insurance Industry
When you are looking for car insurance, your credit score is one of the factors that the insurance company will look at. Your credit score can impact your insurance rates in a few different ways.
One way that credit scores are used is called “insurance scoring.” This is a system that insurers use to try and predict how likely it is that you will have an accident. They do this by looking at your credit history and credit score. The theory is that if you have bad credit, you are more likely to have an accident than someone who has good credit.
Insurance companies sometimes use credit-based insurance scores to decide whether or not to offer you a policy and how much to charge you for it. They may also use credit scores to determine how much coverage to provide you with. For example, if you have a low credit score, the auto insurance company may decide to only offer you liability coverage and not comprehensive and collision coverage.
If you are concerned that your credit score is impacting your rates, you can ask the insurance company for a copy of your credit-based insurance score. You can then review it to see what factors are affecting your score and work on improving them.
What Company Has the Best Rates for Good Drivers with Poor Credit?
There are a few companies that tend to have the best rates for good drivers with poor credit. Geico generally has the best rates for good drivers with poor credit, with their full coverage policies coming in at an average of $1,748.
If you have poor credit, it's important to check your credit report and credit scores regularly. You can get free credit reports from AnnualCreditReport.com, and you can check your credit scores for free on Credit Karma. By monitoring your credit, you can catch any errors or negative information that might be dragging down your score. Keeping an eye on your score means you'll know when you might be able to qualify for a better rate.
If you're looking for a new car insurance policy and have poor credit, it's also a good idea to compare rates from multiple companies.
How to Build Your Credit and Get Cheaper Insurance
Building your credit score is something that everyone in the United States has to deal with, and in many cases, a person’s credit can be damaged in their younger years. This is due to a lack of knowledge around credit and failure to be educated on its importance. If you have a lower credit score than you’d like, the below steps will help you to build your credit back up, and having a higher credit score will lead to reduced interest rates and insurance premiums in the future.
Pay your bills on time: One of the most important things you can do for your credit is to make sure you always pay your bills on time. This includes credit card payments, rent, and utilities. Late payments can negatively impact your credit score and make it more difficult to get approved for loans or credit cards in the future.
Pay off your credit card debts: Another important part of maintaining a good credit score is paying off credit card debts. When you have credit card debts, it means you're using more of your available credit, which can lower your credit score. It's best to try to pay off as much of your debt as possible so you can free up more of your credit limit.
Pay down credit card balances: In addition to paying off your credit card debts, you should also try to pay down the balances on your credit cards. This is because credit card companies typically report your balance as your credit limit. So, if you have a credit limit of $1000 and a balance of $500, your credit utilization ratio would be 50%. A lower credit utilization ratio is better for your credit score.
Limit hard credit inquiries: Hard credit inquiries occur when you apply for a loan or credit card, and the lender checks your credit score. These inquiries can slightly lower your credit score. So, it's best to limit the number of hard credit inquiries you have.
Find out your credit-based insurance score: Insurance companies often use credit-based insurance scores to determine your premium. So, if you have a good credit score, you may be able to get a lower insurance premium.
Get a copy of your credit report: You can get a free copy of your credit report from each of the three major credit bureaus every year. It's important to review your credit report so you can catch any errors or potential identity theft.
Your credit report includes:
Your credit score
Your credit utilization ratio
Your credit history
Your credit accounts
Your credit inquiries
Your credit limits
Your credit payments
Your accounts opened
Your medical debt
The age of your accounts
Your personal details
When analyzing your credit score and/or your credit-based insurance score, the above can help you to see what could be bringing it down. One good way to help increase your credit score is to be added as an authorized user on a friend or family member’s credit card. Their account must be in good standing, and their repeated on-time payments and low credit balance can help to build your credit.
Conclusion
A credit-based insurance score is one factor that an auto insurance company looks at when deciding how much to charge you for car insurance. It is different from your regular credit score, and it’s used within the insurance industry to predict how likely you are to have a claim. Scores can range from 0–997, with 997 being the best score. If you’re looking for affordable insurance, it’s important to understand your credit-based insurance score and what factors go into determining your premiums.