Your credit score is an essential indicator of the health of your credit history. But having good credit isn’t just important if you’re applying for a loan or credit card; in many states, auto and homeowner’s insurance companies also use your credit history to help determine your rates.
If you’re hoping to find ways to save money on car insurance or homeowners' insurance premiums, here’s why focusing on your credit is crucial.
What is a credit-based insurance score?
Unlike many lenders, home and auto insurance companies don’t use a traditional FICO credit score to help calculate your rate. Instead, they use what’s called a credit-based insurance score. These scoring models consider many of the same factors that FICO uses for its traditional credit score, but with a few differences.
According to the National Association of Insurance Commissioners, 95% of auto insurers and 85% of homeowner’s insurers use credit-based insurance scores in states where they’re legally allowed to do so. The only states that have outlawed the practice are California, Hawaii, and Massachusetts.
One thing to keep in mind is that states typically don’t allow insurance companies to use your credit-based insurance score as the sole reason for hiking your rate or denying, canceling, or refusing to renew a policy.
In other words, if your driving record is spotless, and every other aspect of your application is in good shape but you have a bad credit score, you likely won’t end up paying a higher rate because of it. But if you have a low credit score plus a negative mark on your driving record or a lapse in coverage, it could compound the premium increase.
Unfortunately, insurers haven’t disclosed how much a bad credit score can cost you, and premium increases can reflect several different factors.
How do insurance credit scores work?
There are a couple of different options insurers can use, including the FICO Insurance Score and the LexisNexis Attract Score.
FICO doesn’t list a range for its insurance-based credit score, but it considers all the same factors as a traditional FICO credit score, albeit with different weightings:
- Payment history (40%)
- How much you owe (30%)
- Length of credit history (15%)
- Recent inquiries (10%)
- Credit mix (5%)
LexisNexis doesn’t disclose weightings for its Attract Score, but it does list the following factors that go into calculating your insurance credit score:
- Length of credit history
- Payment history
- Amount of debt
- Recent credit inquiries
- Accounts in good standing
LexisNexis Attract credit score ranges from 200 to 997 with the following ranges:
- Good credit score: 776 to 997
- Average credit score: 626 to 775
- Below-average credit score: 501 to 625
- Less-desirable credit score: 200 to 500
Your insurance-based credit score can vary based on the credit scoring model the insurance company uses, as well as which credit bureau it requests data from to calculate your score. In some cases, certain items may show up on your credit report with Experian or Equifax but not TransUnion.
Insurance credit score vs. credit scores
The differences between insurance credit scores and traditional credit scores aren’t big, but they allow insurers to get a general sense of your credit history plus a little extra focus on the elements that matter most to them.
For example, here’s how the FICO Insurance Score compares with the base FICO score you typically see when you check your credit:
|FICO insurance score
|Base FICO score
|How much you owe
|Length of credit history
In other words, FICO has determined that your payment history is more important for insurance companies than how many different types of credit you have (i.e. your credit mix).
LexisNexis Attract Score doesn’t provide weightings, but it replaces the credit mix factor entirely with how many accounts you have in good standing. But again, these revisions are so minor that it’s unlikely you’ll have a good traditional FICO score and a bad insurance-based credit score.
5 tips for saving on your car insurance
Whether you have great credit, here are some ways you can reduce your rates on your auto and homeowner’s insurance policies.
1. Shop around
The best way to save money on insurance is to shop around. There are several different insurers out there, and each has its own criteria for determining your premiums.
Request rate quotes from at least three to five auto or homeowners insurance companies to get an idea of which one will give you the best rate. Make sure to request all the same features, though, so you’re comparing apples to apples.
2. Ask for discounts
Every insurance company offers discounts, but not all of them are created equal. As you go through the quote process, check to see which discounts are available and which ones you’re eligible to receive. It may even be worth calling and speaking with an agent to see if there are any discounts you’re missing.
3. Reduce your coverage
Most states require a minimum amount of liability coverage, and if you’re financing your car, your lender may have some additional requirements on top of that. But above those minimums, the policyholder gets to choose how much coverage they need for their car.
Reducing your coverage can help you save money on your premiums because it lowers the amount the company potentially has to pay out if you file a claim. Just make sure you don’t cut too much. Otherwise, you could end up footing part of the bill yourself if your coverage runs out.
There may also be certain types of insurance coverage you need or don’t need based on your driving habits. Be mindful of what’s necessary with a policy and what isn’t.
4. Ask for a higher deductible
Your deductible is the amount you have to pay out of pocket if you file an insurance claim on your policy. For example, if you have a $500 deductible on your collision coverage and get in an accident in which you’re at fault, you’ll pay $500 toward repairing your vehicle and your insurer will cover the rest.
The higher your deductible, the less money the insurer has to pay out, so increasing your liability will lower your car insurance rates. Just make sure you can afford the deductible amount if something does happen and you need to file a claim.
5. Reevaluate once a year
Although one insurer may offer the best rate right now, that doesn’t mean it’s still the best rate a year down the road. If you’ve improved your credit or certain aspects of your situation have changed, you may be able to switch to a different insurance carrier and save money.
As a result, it’s a good idea to check at least once a year to make sure you’re still getting the best rate. If not, switching is easy and can save you big time.
FAQs about insurance credit scores
Here are some of the common questions we found about credit-based insurance scoring, along with their answers.
Does insurance score affect my credit?
No. An insurance credit score is simply a way to calculate how much potential risk you pose to an insurance company based on your credit history. When an insurance company runs your credit information to calculate your insurance credit score, it’s done as a soft pull, not a hard credit pull, so it doesn’t impact your credit score in any way.
What factors go into insurance score?
The factors depend on the type of insurance credit score the insurer uses. The FICO Insurance Score, for instance, uses all the same factors as the traditional FICO score, but makes a couple of changes to the weighting of your payment history and your credit mix.
The LexisNexis Attract Score considers four of the five factors the FICO Insurance Score does, but replaces your credit mix with how many accounts you have in good standing.
How do I check my insurance score?
You can purchase a LexisNexis report to view your Attract Score, along with explanations for each factor. However, FICO doesn’t provide a way to view your FICO Insurance score if that’s the one your insurer uses.
Do all insurance companies use credit scores?
No. California, Hawaii, and Massachusetts have banned the practice of using insurance-based credit scores. In the other 47 states, 95% of auto insurers and 85% of homeowners insurers use your insurance credit score to help determine your rate.
Are car insurance rates based on credit score?
Car insurance companies may use your credit-based insurance score to help determine your policy’s rates, but you likely won’t see a change based on bad credit unless there’s another negative factor that could cause a rate increase.
The bottom line on insurance-based credit scores
Your credit history can impact how much you pay on your auto and homeowner’s insurance policies, so it’s a good idea to take steps to improve your credit score if you want lower premiums. That said, it’s important to keep in mind that insurers don’t necessarily use your credit as the sole reason for increasing your rate, and some states don’t allow the practice.
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