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Insurance companies consider several factors when deciding how much drivers pay for their car insurance. They look at the driver’s accident, ticket and claims history, the type of car they drive, the general area where they live and how many miles they drive. If all of those factors are in top shape, but you notice that your premiums are still high, it could be because your credit-based insurance score is a little low.
A credit-based insurance score is a way for insurance companies to determine how likely you are to file an insurance claim after an accident.
Insurance scoring companies calculate scores in a way that's similar to how a credit company calculates a score: companies look at a driver's payment history, credit history length, outstanding debt, hits for new credit and credit mix. They'll then get a number between 200 and 997, which the insurance companies have grouped into tiers.
Insurance score reporting companies can also produce identical scores for auto insurance, homeowners insurance or renters insurance. However, more widely used scoring companies like LexisNexis will generate a separate score for each type of insurance[1].
Credit scores and insurance scores are similar because they use the same factors to determine the person’s score. Both companies look at the following to give a driver their customers their scores:
Payment history
Credit history length
Credit mix
Outstanding debt
Pursuit of new credit
However, the companies who generate the scores rate each factor differently because each score serves a different purpose: a credit score shows how likely you are to repay debt. In contrast, a credit-based insurance score determines how likely you are to file a claim.
Similar to a credit score, certain factors are off-limits when rating a credit-based insurance score. Factors that are out of bounds include:
Race
Gender
Marital status
Age
Religion
Location of residence
Occupation and income
Because companies use the same factors, factors that negatively impact your credit score can do the same for your credit-based insurance score. This includes:
Having little to no credit history
Missing payments
Carrying high balances on credit cards compared to credit limits
Having too many hard credit inquiries
Credit-based insurance scores range from 200 to 997. Like credit scores, insurance scores are grouped into tiers; however, those tiers don’t align with “good credit” or “bad credit”.
Insurance companies then rate their customers based on the tier that each driver’s score falls within. The way each insurance company groups and rates the tiers differs from company to company. Generally speaking, however, the tiers look something like this:
High: 997-776
Average: 775-626
Below average: 625-501
Low: Under 500
Insurance scoring is only available in some states. Companies can’t base their choice to cancel coverage or increase rates solely on a driver’s score. Furthermore, states like California, Massachusetts, Hawaii and Michigan have outlawed using any credit-based score to determine insurance rates.
We dived deeper into credit scores and insurance so you don't have to. Check out our handy articles on which car insurance companies don't use credit scores, best car insurance companies for good credit and best companies for bad credit.
Because credit and insurance scores use the same credit information to determine your score, the best way to improve your insurance score is to build your consumer credit. Steps to take include:
Paying bills on time: Score-issuing companies view your past use of credit as a way to determine whether you’ll pay your bills on time in the future.
Paying down credit cards: Reducing your credit utilization, or how much credit you use compared to how much is available, shows creditors that you’re responsible with your credit. Keeping credit utilization around 30% typically yields the best results.
Reduce the number of hard credit inquiries: Hard credit pulls, like those to get an auto loan, home loan or student loan, are another factor that rating companies consider when giving you a score. Wait at least six months between pulls to reduce the impact on your credit score.
Request your LexisNexis report: Customers can request a copy of this report for free on the LexisNexis website and check it to ensure everything is accurate.
Monitor your credit score: Everyone can pull their credit report from credit bureaus including Experian, Transunion and Equifax once every 12 months for free, according to the Fair Credit Reporting Act. You can access your free credit report from annualcreditreport.com. Each report should include the following:
Payment record and length of credit history
Each account’s age
Revolving credit and medical debt
Credit limits
Identification data
Accounts opened
Hard credit inquiries
Balances
Job, address, and other personal details
Customers can use your copy of your credit report to pinpoint which aspect is dragging down their score and work to improve that factor and their overall score.
Besides insurance scores, LexisNexis also produces an auto report called a Comprehensive Loss Underwriting Statement, or a CLUE, report. This report contains any tickets or accidents a customer has gotten into within the last 5-7 years, whether you were at fault, and how much the company had to pay for repairs and medical expenses.
The reports also include drivers that were on your policy and any accidents they got into that your company had to pay out. LexisNexis sells this report to insurance companies, and agents will review the information to decide if their company can insure you.
The insurance industry focuses on the insurance risk that each customer poses. They use insurance scoring models, of which credit is often a factor, to determine the cost of your insurance policy.
While the use of credit-based insurance is controversial and is against the state law of a handful of states, it is currently a major factor that affects the insurance quotes of millions of Americans.
For policyholders who live in states where insurance credit scores are allowed, staying on top of credit along with other rating factors will improve the insurance quotes you’re offered.
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