Credit Scores And Auto Insurance: What's The Connection?

Credit scores are used by auto insurance companies to determine how likely a customer is to file a claim, with a poor score typically resulting in higher insurance rates. While the use of credit scores in pricing auto insurance is controversial, it is still practised by about 95% of auto insurers. However, there are a few states in which credit scores cannot be used to determine insurance rates, and some companies that do not use credit scores at all.

Credit-based insurance scores are different from regular credit scores

Credit-based insurance scores are calculated by data analytics companies like LexisNexis and FICO. They are designed to predict the likelihood of an individual filing insurance claims that will cost the insurance company more than the premiums collected. Credit-based insurance scores are used by insurance companies to set premiums.

Scoring Factors

While both types of scores are based on similar underlying information from an individual's credit report, the weighting of these factors can differ. Credit-based insurance scores consider factors such as payment history, outstanding debt, credit history length, pursuit of new credit, and credit mix. On the other hand, regular credit scores typically focus on payment history, credit utilisation, length of credit history, credit mix, and recent credit applications.

Score Range

Most credit scores used by lenders range from 300 to 850. In contrast, credit-based insurance scores can have different ranges, such as the LexisNexis Attract score, which ranges from 200 to 997.

Predicted Outcomes

Credit-based insurance scores and regular credit scores predict different outcomes. Credit-based insurance scores predict the likelihood of an individual filing insurance claims that will result in a loss for the insurer. On the other hand, regular credit scores predict the likelihood of an individual missing a bill payment by at least 90 days.

Usage

Credit-based insurance scores are used specifically by insurance companies to help set insurance premiums. In contrast, regular credit scores are used by lenders and creditors to assess creditworthiness and determine whether to approve loan or credit card applications.

Availability

It is important to note that credit-based insurance scores are not easily accessible to individuals. While you can request your credit-based insurance score from your insurance agent, it may not always be possible to obtain it. On the other hand, regular credit scores are readily available, and individuals can easily obtain copies of their credit reports and scores from credit bureaus.

Credit scores are used to predict insurance claims

Credit scores are used by auto insurance companies to predict the likelihood of customers filing insurance claims. This is referred to as a "credit-based insurance score". It is used to assess the statistical likelihood of a customer filing insurance claims that will result in a loss for the insurance company. The credit-based insurance score is calculated using information from a consumer's credit report, including payment history, credit card balances, credit limits, and age of credit accounts.

Credit-based insurance scores are used by insurers in conjunction with other factors, such as motor vehicle reports, claims history, and home inspections, to evaluate the risk of insurance applicants. These scores help insurers make more informed decisions about the likelihood of future claims and ensure that customers pay rates that correspond to their risk of loss.

While credit-based insurance scores are widely used, they are not the sole factor in determining insurance rates or denying coverage. Other criteria considered by auto insurance companies include driving records, location, demographics, vehicle type, and insurance coverage types.

It is worth noting that credit-based insurance scores are different from traditional credit scores used by lenders. Insurance scores focus on predicting the likelihood of insurance claims, while credit scores predict the risk of missing bill payments. Additionally, credit-based insurance scores may have different scoring ranges compared to traditional credit scores.

Credit scores can affect insurance premiums

Credit scores can have a significant impact on insurance premiums, with those with good credit often paying far less for insurance than those with a poor credit history. The difference in average auto insurance rates between the lowest and highest credit levels can be upward of $1,500 per year.

In most states, insurance companies are allowed to use credit-based insurance scores to help them decide whether to offer someone an insurance policy and the premiums for the policy. These scores are based on consumer credit reports and are used to predict the likelihood of filing insurance claims that will cost the company more than the premiums collected.

While credit scores are not the only factor in determining insurance rates, they can play a significant role. Other factors considered by insurance companies include age, gender, marital status, vehicle type, insurance type, and driving record.

It's important to note that insurance companies don't use the same credit scores as lenders. The credit-based insurance scores are designed specifically to predict the likelihood of filing insurance claims. Additionally, insurance companies generally can't make decisions solely based on credit history or credit-based insurance scores and must consider other factors as well.

Improving one's credit score can lead to lower insurance premiums. Some ways to improve credit scores include paying bills on time, maintaining a low credit utilization rate, and regularly reviewing one's credit report for errors.

While credit scores can affect insurance premiums, it's worth noting that certain states have laws prohibiting or limiting the use of credit scores in setting insurance rates. These states include California, Hawaii, Massachusetts, Michigan, and Maryland.

Some US states ban or limit the use of credit scores for insurance

While most US states allow insurance companies to use credit-based insurance scores to determine eligibility and rates, some states have banned or limited the use of credit scores for insurance. As of 2024, eight states have strict limitations on the use of credit scores for auto or homeowners insurance: California, Hawaii, Maryland, Massachusetts, Michigan, Nevada, Oregon, and Utah. Washington state also temporarily banned the use of credit scores for insurance in 2021 and 2022, but the ban was overturned by a state court before it could take effect.

In California, insurance companies cannot use credit-based scores or credit history for underwriting or rating auto policies, or for setting rates for homeowners insurance. Hawaii bans the use of credit ratings for underwriting standards and rating plans for auto insurance, but credit history can impact homeowners insurance. In Maryland, credit history cannot be used as a reason to refuse coverage, cancel a policy, refuse to renew a policy, or base insurance rates for homeowners insurance. For auto insurance, credit history can be used to determine rates on a new policy, but it cannot be used to deny an initial application, cancel a policy, refuse to renew a policy, or increase premiums during renewal.

Massachusetts law forbids the use of credit information or credit-based insurance scores for setting rates, underwriting new policies, or renewing auto policies, as well as for determining homeowners insurance rates. In Michigan, credit scores cannot be used as part of the decision-making process to deny, cancel, or refuse to renew an auto or homeowners insurance policy, nor can they be used to determine rates for auto insurance. However, credit scores may be considered when deciding which installment payment options to offer.

Nevada temporarily limited the use of credit scores by insurance companies during the COVID-19 pandemic. Through May 20, 2024, insurance companies in Nevada cannot consider negative credit information from events that occurred after March 1, 2020, when deciding to deny, cancel, or refuse to renew a policy or increase premiums on an existing policy. Oregon and Utah also have similar restrictions, where credit history cannot be the sole factor in deciding whether to offer or renew a policy.

The limitations on the use of credit scores for insurance in these states aim to address concerns about the potential unfairness of using credit scores to calculate insurance premiums, particularly for individuals facing financial struggles or those from low-income and minority communities.

Credit scores are one of many factors in determining insurance rates

Credit scores are one of many factors that auto insurance companies consider when determining insurance rates. While some companies are starting to move away from this practice, about 95% of auto insurers use credit-based insurance scores to determine car insurance rates.

In the US, credit-based insurance scores are used to determine how likely someone is to file a claim. They give insurers an idea of how big a risk someone is to cover and help them decide on the price of coverage. These scores are based on consumer credit reports and are different from the scores that lenders use. Insurance companies are generally prohibited from making decisions solely based on credit scores.

In addition to credit scores, auto insurance companies consider various other factors when setting rates, including:

• Demographics (age, gender, and marital status)
• The type of vehicle being insured
• The types of insurance, coverage amounts, and deductibles desired
• Whether the customer qualifies for any discounts

In some US states, the use of credit scores in setting insurance rates is banned or limited. As of July 2024, these states include California, Hawaii, Massachusetts, and Michigan.

Frequently asked questions