How Does Your Credit Score Affect Auto & Home Insurance Rates?
According to the National Association of Insurance Commissioners (NAIC), “95% of auto insurers and 85% of homeowners insurers use credit-based insurance scores in states where it is legally allowed.”
What is this mysterious number, though? How is it calculated? Can it affect what you pay for insurance coverage? And if it’s low, is there anything you can do to increase your insurance score?
So that you can gain a better understanding of this important metric, the knowledgeable professionals at IHS Insurance Group will quickly answer your essential questions here.
What is an Insurance Score?
In a nutshell, an insurance score uses historical data to predict future behavior. Specifically, the probability that you’ll file claims under your auto, home, health, and life insurance policies.
While it’s a complex calculation that can differ significantly between carriers, the following factors are typically included in your insurance score:
- Insurance & Payment History – The number of years you’ve been insured, if you’ve ever been canceled for non-payment, etc. The NAIC reports this factor alone accounts for 40% of your insurance score.
- Your Personal Financial History – Criteria like payment history, outstanding debt, how long your lines of credit have been in force, recent credit applications, and your credit mix (e.g., cards, mortgage, auto loans, and so forth) can come into play.
- Citations & Claims History – Traffic citations and accidents (even not-at-fault ones) that occurred within the past three to five years impact what you pay for insurance.
- Vehicle Details & Usage – The number of miles you drive each year, the number of vehicles and drivers on your policy, vehicle use (e.g., business vs. pleasure), and each vehicle’s make and model can impact what you pay.
- Your Individual Details – Age, education level, where you live, etc.
Insurance companies pool this data and use it to produce a single number that represents your likelihood of filing a claim: the lower the number, the higher the probability of a loss, and vice-versa.
How Does Insurance Score Affect Your Premium?
Each company places a different emphasis on insurance scores during their rating process, so there isn’t a single number that every carrier uses to determine how much you’ll pay (more in a moment).
Still, just like having a low credit score means you’ll likely pay higher interest rates on loans, the lower your insurance score, the higher your home, auto, health, and life insurance premiums will be.
What’s the Difference Between Insurance Score & Credit Score?
As outlined above, a credit score is one critical component that determines your insurance score. However, the insurance score also takes into account additional factors like tickets, claims filed, and risk-specific details like vehicles, drivers, and so forth.
As the NAIC defines it, “A regular credit score looks at many different factors to determine how likely you are to repay a loan or a line of credit. A credit-based insurance score looks at some, but not all, factors in your credit history to determine how you are likely to manage your risk exposure,” they explain.
What is a Good Insurance Score?
Despite its popularity for determining risk, there isn’t a standard insurance score, since each reporting company calculates their numbers differently.
For example, insurance scores provided by the Fair Isaac Corporation (FICO) range between 250 and 900, whereas TransUnion reports scores between 300 and 850. LexisNexis ranks its insurance scores between 500 and 997.
Given these details, an insurance score of 770 or higher is typically considered “good,” with a number of 500 or below considered “poor.”
Even then, each insurance company defines what they consider “good” and “bad” scores, depending on the type of business they want to attract.
For example, if Company A is looking to attract more drivers, they might cast a wider net by offering lower premiums to policyholders with an insurance score of at least 650. On the other hand, Company B might increase the threshold for discounts to scores of 800+, if they only want top-tier accounts.
How Can You Increase Your Insurance Score?
Although each reporting company provides different insurance scores, and each carrier emphasizes scores in different ways, there are still some basic guidelines you can follow to increase your score meaningfully:
- Monitor Your Credit – Since there’s a strong correlation between credit score and insurance score, it’s crucial that you pay your bills on time and minimize your revolving debt if you’re looking to maximize your insurance score.
- Drive Safely – Avoid getting citations for speeding, careless driving, and so forth.
- Avoid Filing Claims – Depending on the insurance carrier, any claims you file can increase your rates for as long as five years from the date of the accident. As a result, you’ll want to minimize the number of claims filed under your policy.
IHS Pro Tip: Keep in mind that the vast majority of individuals do not possess a “perfect” insurance score, so make sure you maintain realistic expectations regarding how much you can expect to increase yours.
The good news? Insurance companies typically run new credit scores at each annual renewal, which means it can impact your premium in different ways from year to year.
According to the NAIC, “You can ask your insurance company if a credit-based insurance score was used to underwrite and rate your policy and which risk category you were placed in after you receive a quote.”
How Can You Learn More About Your Insurance Score?
You can also reach out to the team at IHS Insurance Group. We’re here to help answer your questions, so feel free to contact us today!
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