Jeffrey Wade
Insurance companies often use credit-based insurance scores to determine an individual's insurance premiums. While credit-based insurance scores are not the same as regular credit scores, they are calculated based on similar factors, including payment history, outstanding debt, credit history length, pursuit of new credit, and credit mix. Credit-based insurance scores are used by insurers to assess an individual's creditworthiness and determine the likelihood of them filing expensive claims. It is important to note that not all states allow the use of credit-based insurance scores, and individuals have the right to request corrections to their credit reports if they identify any errors.
| Characteristics | Values |
|---|---|
| To determine premiums | In most states, insurers can use credit-based insurance scores to determine premiums. However, some states place restrictions or outright bans on this practice. |
| To assess risk | Insurers use credit-based insurance scores to assess an individual's risk profile. |
| To make decisions about whom to insure | Insurers use credit information as one of several factors when deciding whether to insure an individual. |
| To check for errors | Individuals should check their credit reports for errors, as these can affect their credit-based insurance scores. |
| To improve credit-based insurance scores | Individuals can improve their credit-based insurance scores by making timely payments, paying down debt, and keeping credit card balances low |
| To obtain free credit reports | The Fair and Accurate Credit Transaction Act of 2003 (FACT Act) allows individuals to obtain free credit reports annually from Equifax, Experian, and TransUnion. |
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What You'll Learn
- Insurers use credit-based insurance scores to determine premiums
- Credit-based insurance scores are not the same as credit scores
- Credit-based insurance scores are based on payment history, debt, and credit history
- Errors in credit reports can impact insurance scores
- Not all states allow credit-based insurance scores to determine premiums
Insurers use credit-based insurance scores to determine premiums
In most states, insurance companies can use credit-based insurance scores to determine premiums. However, it is important to note that credit-based insurance scores are not the same as regular credit scores. FICO, a data and analytics company that measures credit risk, states that many insurers use credit-based insurance scores in states where it is legally allowed.
Credit-based insurance scores are determined by several factors, including payment history, outstanding debt, credit history length, pursuit of new credit, and credit mix. Payment history and outstanding debt are typically the most heavily weighted factors, accounting for 40% and 30% of the score, respectively. Credit history length and the pursuit of new credit also play a role, with weights of 15% and 10%, respectively.
Insurance companies believe that using credit-based insurance scores helps them assess the risk associated with insuring an individual and determine appropriate premiums. By analysing factors such as payment history and outstanding debt, insurers can predict the likelihood of costly claims and adjust premiums accordingly. Those with strong credit-based insurance scores may benefit from lower premiums, while those with weaker scores may face higher premiums.
It is worth noting that not all states permit the use of credit-based insurance scores. Some states, such as California and Hawaii, restrict insurance companies from considering credit information for certain types of insurance, like auto policies and homeowners insurance. Other states, like Utah, allow credit information to be used when initially offering a policy but prohibit its use after the customer has been with the company for a certain period. It is advisable to check with your state insurance department to understand the specific laws and regulations governing the use of credit information in insurance.
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Credit-based insurance scores are not the same as credit scores
The five areas that FICO, a data and analytics company, considers when determining an individual's credit-based insurance score are:
- Payment history (40%): This includes how well individuals have made payments on their outstanding debt in the past.
- Outstanding debt (30%): This takes into account the amount of debt an individual currently has.
- Credit history length (15%): The length of an individual's credit history is also considered, including how long they have had a line of credit.
- Pursuit of new credit (10%): FICO looks at whether an individual has applied for new lines of credit recently.
- Credit mix (5%): The types of credit an individual has, such as credit cards, mortgages, or auto loans, are also considered.
It is important to note that credit-based insurance scores do not use any personal information to determine an individual's score. Certain types of inquiries on a credit report, such as account reviews, employment inquiries, or promotional inquiries from credit companies, are not included in the calculation of credit-based insurance scores.
While credit-based insurance scores are used by insurers in most states to determine premiums, it is not allowed in all states. Some states only permit its use as a factor for property insurance, such as auto and homeowners insurance. To understand how credit-based insurance scores impact insurance premiums, individuals should check with their state insurance department to learn about the specific laws and regulations in their state.
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Credit-based insurance scores are based on payment history, debt, and credit history
Credit-based insurance scores are not the same as a regular credit score. They are used by insurers to determine an individual's insurance premiums. The scores are based on five factors: payment history, outstanding debt, credit history length, pursuit of new credit, and credit mix.
Payment history, which includes how well an individual has made payments on their outstanding debt in the past, is weighted at 40% in credit-based insurance scores. This means that consistently making payments on time and catching up on missed payments can significantly improve an individual's credit-based insurance score.
Outstanding debt, or how much debt an individual currently has, accounts for 30% of the credit-based insurance score. To improve this aspect of their score, individuals should keep credit card balances as low as possible.
Credit history length, or how long an individual has had a line of credit, makes up 15% of the credit-based insurance score. This factor considers the length of time an individual has had access to credit, regardless of the type of credit (credit card, mortgage, auto loan, etc.).
Pursuit of new credit, or whether an individual has applied for new lines of credit recently, accounts for 10% of the credit-based insurance score. This factor considers how often an individual has applied for new credit and the types of credit they have applied for.
While credit-based insurance scores are based on similar factors to regular credit scores, they do not use any personal information to determine the score. Instead, they focus on financial behaviour patterns to predict the risk of loss and adjust insurance premiums accordingly.
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Errors in credit reports can impact insurance scores
Credit-based insurance scores are calculated using information from your credit report, but they are different from your credit score. Insurers use this score because policyholders with good credit-based insurance scores generally file fewer or less expensive claims. This conclusion is based on industry research and claims history.
Credit scores are calculated based on multiple factors like bankruptcies, debt, bill-paying habits, how long accounts have been open, and the amount of credit used on credit cards. A higher score is better. A credit-based insurance score considers five general areas: payment history, outstanding debt, credit history length, pursuit of new credit, and credit mix.
In most states, insurers can use your credit-based insurance score to determine your premiums. However, it is important to understand your state's law on the use of credit, as not all states allow credit-based insurance scores to be used in determining premiums. Some states only permit it as a factor for property insurance, while others allow it for any type of insurance.
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Not all states allow credit-based insurance scores to determine premiums
In the United States, insurance companies often use credit-based insurance scores to determine an individual's premiums. These scores are based on information found in an individual's credit report, such as payment history, outstanding debt, credit history length, pursuit of new credit, and credit mix. While this is a common practice, not all states allow credit-based insurance scores to be used as the sole factor in determining premiums.
Some states have banned the use of credit scores in setting insurance rates altogether. For example, California has established regulations through Proposition 103 to prohibit discriminatory practices against policyholders based on their credit history. Similarly, Hawaii bans auto insurers from using credit ratings when setting standards, including underwriting standards and rating plans that determine premiums. Maryland also has restrictions, preventing homeowners insurance companies from refusing coverage or setting rates based on credit history.
Other states have more nuanced approaches. For instance, in Massachusetts, auto insurance companies cannot use credit information when setting rates, underwriting new policies, or renewing policies. However, credit information can still impact homeowners insurance rates. Michigan has similar restrictions, prohibiting the use of credit scores in approving, denying, cancelling, or renewing auto or homeowners insurance policies. Oregon also prohibits the use of credit information in cancelling or denying policy approval.
While most states allow credit-based insurance scores to be a factor in determining premiums, there is a growing trend of states re-evaluating this practice. This is partly due to concerns about the potential for errors and omissions in credit reports to negatively impact insurance rates and disproportionately affect certain demographics. As a result, states like Washington have implemented temporary bans on using credit scores to change rates and premiums during the COVID-19 pandemic, recognizing that financial struggles during this time could lead to lower credit scores.
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Frequently asked questions
Insurance companies use your credit rating to help them decide whether to sell you insurance and how much it will cost.
A credit-based insurance score is different from your regular credit score. It is a snapshot of your credit history and is used to determine how much of a risk you are to insure.
You can ask your insurance company if a credit-based insurance score was used to underwrite and rate your policy. You can also check your credit report and FICO Score for free from Experian.
Several factors influence your credit-based insurance score, including payment history, outstanding debt, credit history length, pursuit of new credit, and credit mix.
