Understanding Credit-Based Insurance Scores
How your credit profile can affect your insurance rates and premiums.
You probably know what a big impact your credit has on your financial life. What you may not know is that impact may extend to how much you pay for insurance. From your auto insurance to even homeowners insurance, policy providers have the right in some states to consider your credit history as a key factor in how much you pay for the coverage you need. That means financial distress and missed debt payments could have a bigger effect on your budget than you think.
The information below can help you understand how credit-based insurance scores work and what you need to know if you live in a state where these types of scores are used. If you have questions or need help eliminating debt that could lead to credit damage, we can help. Call Consolidated Credit today at or complete an online application to request a free debt analysis from a certified credit counselor.
What is a credit-based insurance score?
This type of score is similar to a traditional credit score, but with slight tweaks to help insurers assess your risk and the potential for you to make a claim. Basically, analysts have found a correlation between a consumer’s credit and the likelihood that the consumer will need to make a claim and use their coverage. So a high credit-based insurance score means better premiums and more affordable coverage.
Like traditional credit scores, FICO provides insurers with credit-based insurance scores as well. The five factors used for the insurance score are the same as the five used for a traditional credit score – they’re just weighted a little differently:
- Payment history = 40%
- Total outstanding debt = 30%
- Length of time using credit = 15%
- New credit applications = 10%
- Types of credit in use = 5%
The NAIC reports from FICO that 95% of auto insurance companies and 85% of homeowners insurance companies use credit-based insurance scores in states where it’s permitted.
Types of insurance affected
Where you live is a key determining factor in which types of insurance underwriters can use your credit-based insurance score to calculate your risk as a policy holder. In some states, this score only applies to auto insurance, in some its auto and homeowners insurance, in some it applies to all types and a few don’t allow these scores to be used at all.
The National Association of Insurance Commissioners (NAIC) provides a list of contact information for each state’s insurance department. Contact the department for your state to learn if credit-based insurance scores are applicable and to which types of coverage they apply.
How credit-based insurance scores work
When you apply for an insurance quote from a provider, you go through the underwriting process where they assess your risk. In the world of insurance, risk is measured by how likely you are to make a claim that the insurer would have to pay out.
Any number of factors goes into determining how much of a risk you are, so credit-based insurance score is simply one factor counted amongst many when you ask for a quote. So for instance, for car insurance they might consider your score along with your age and the make and model of your car. For homeowners insurance, they’d assess the property location as well as your credit-based insurance score.
Once the insurer assesses your risk, they offer you a quote at a certain rate with set premiums. So credit-based insurance scores are one factor in this assessment, but they can have a big impact on how much you pay to keep yourself protected.
According to a study conducted by the FTC in 2007, the median premium increase for people with low credit-based insurance scores is 16 percent, while the median decrease for those with high scores is 13 percent.
What you can do raise your score
Just like you see with traditional credit scores, your credit-based insurance score is directly correlated to your ability to manage debt effectively. If you keep your balances low, pay your bills on time and only apply for new credit sparingly, your credit-based insurance score shouldn’t present any problems to getting the rates you want. It’s only when you start to miss payments or max out your credit cards that it becomes an issue that could impact your insurance premiums.
Unfortunately, unlike waiting to apply for loans or new credit lines because you’re working to build a better credit score, you usually can’t put off getting insurance. As a result, you’re essentially stuck with credit-based insurance score you have at the time you need coverage. In most cases a bad score simply means higher premiums, but in the worst case scenarios you can actually be denied coverage.
As with your traditional credit score, the only recourse is to put in work to rebuild your credit. There is no (legal) fast track to better credit. You have to work diligently and make sure your credit profile is as clean as possible in order to maximize your score. Luckily – since they use the same factors to calculate – the steps you take to build a better traditional credit score would also improve your credit-based insurance score.
With that in mind, even if you managed to get insured with bad credit, once you’ve taken steps to achieve better credit you should review your insurance policies and take time to shop around so you can save as much as possible on the necessary expense of insurance.