Credit-Based Insurance Scores Aren’t the Same as a Credit Score. Understand How Credit and Other Factors Determine Your Premiums
In most states, insurers can use your credit-based insurance score to determine your premiums. Your credit-based insurance score is not the same as your regular credit score.
According to FICO, a data and analytics company that measures credit risks, many insurers use credit-based insurance scores in states where it is legally allowed.
THINGS YOU NEED TO KNOW
Know how an insurance company uses your credit-based insurance score. An insurance company can only use your credit-based insurance score as one factor in its underwriting process. It will be considered with several other factors that vary by insurance type.
For example, with auto insurance, other factors could be: your ZIP code; the age of the operators; the make, model and age of your car; and even the miles you drive annually. 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.
Know what’s in a credit-based insurance score. There are several different companies that create credit-based insurance score reports for insurers to use. FICO looks at five general areas that it believes will best determine how you manage risk. This is the breakdown of what it considers and how much the information generally weighs in figuring your credit-based insurance score:
Payment history (40%) — How well you have made payments on your outstanding debt in the past.
Outstanding debt (30%) — How much debt you currently have.
Credit history length (15%) — How long you have had a line of credit.
Pursuit of new credit (10%) — If you have applied for new lines of credit recently.
Credit mix (5%) — The types of credit you have (credit card, mortgage, auto loans, etc.).
A credit-based insurance score cannot use any personal information to determine your score. Information that is not in your credit report and cannot be used includes the following:
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Race, color, national origin
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Religion
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Gender
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Marital status
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Age
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Income, occupation or employment history
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Location of residence
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Any interest rate being charged
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Child/family support obligations or rental agreements
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Certain types of inquiries on your credit report like account review inquiries, employment inquiries, promotional inquiries from credit companies, etc.
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Whether a consumer is participating in credit counseling of any kind
Know how to check your credit report and how to get information about improving your credit-based insurance score. The Fair and Accurate Credit Transaction Act of 2003 (FACT Act) allows consumers to obtain a free credit report once every 12 months from each of the three nationwide consumer credit reporting companies (Equifax, Experian and TransUnion). You can go to www.annualcreditreport.com to check all three reports annually without paying a fee or being asked to buy other products. If you find errors on your credit report, contact the credit reporting company to have them corrected; errors could affect your credit-based insurance score.
Many insurers will reconsider a change in premium if a policyholder experienced an extraordinary life circumstance like a catastrophic event, job loss or serious illness.
It is also important to understand your state's law on the use of credit. Contact your state insurance department for that information and tips for how to control your auto insurance rates.
TOP THREE THINGS TO REMEMBER
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Not all states allow the use of credit-based insurance scores in determining premiums. Some states only allow it as one factor for property insurance like auto and homeowners insurance. Other states allow it to be used with any type of insurance. Check with your state insurance department to find out what the law in your state allows.
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Generally, five different factors are used to determine your credit-based insurance score: payment history, outstanding debt, credit history length, pursuit of new credit and credit mix.
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You can improve your credit-based insurance score. Make payments on time. Pay bills, taxes and fines/fees as agreed. If you are behind on payments, catch up and stay current. Keep balances on credit cards as low as possible.
About the National Association of Insurance Commissioners
As part of our state-based system of insurance regulation in the United States, the National Association of Insurance Commissioners (NAIC) provides expertise, data, and analysis for insurance commissioners to effectively regulate the industry and protect consumers. The U.S. standard-setting organization is governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. Through the NAIC, state insurance regulators establish standards and best practices, conduct peer reviews, and coordinate regulatory oversight. NAIC staff supports these efforts and represents the collective views of state regulators domestically and internationally.