Understanding Credit-Based Insurance Scores and Their Impact on Your Insurance Rates

Insurance companies often use credit-based insurance scores to help determine whether to offer or renew a policy and how much to charge in premiums. While it’s not the only factor that affects your eligibility or rates, understanding how your credit history could impact another aspect of your life is crucial. At O1ne Mortgage, we believe in empowering our clients with knowledge to make informed decisions. For any mortgage service needs, feel free to call us at 213-732-3074.

What Is a Credit-Based Insurance Score?

Credit-based insurance scores use your credit history to predict whether you will file claims that result in an insurance company losing money. These scores are used when reviewing new insurance applications or renewing policies for auto, home, and life insurance. While insurance companies generally can’t deny you insurance based solely on your credit-based insurance score, it can influence your ability to get or renew your policy and the rates you pay.

Credit-Based Insurance Scores vs. Credit Scores

There are several similarities and differences between credit-based insurance scores and consumer credit scores:

Similarities

• Competing companies create scores: Several companies, including FICO and VantageScore®, create versions of credit scores for creditors. Similarly, FICO, LexisNexis, and TransUnion create credit-based insurance scores for insurance companies.
• Your scores primarily depend on your credit report: Many credit risk scores and credit-based insurance scores only consider the information from one of your credit reports.
• The scores rank consumers: Both types of scores rank consumers based on the likelihood of missing a payment or filing an insurance claim. A specific score isn’t necessarily good or bad; it’s up to the lender or insurance company to decide how to use that information.
• Reason codes explain your score: When a company takes an adverse action based on your credit data, it may send you an adverse action letter containing reason codes that explain why your score wasn’t higher.

Differences

• What the scores predict: Credit-based insurance scores predict whether a consumer will file claims that cost the insurance company more than it earns from premiums. Credit scores predict the likelihood that a consumer will be 90 or more days late on a credit payment in the next 24 months.
• The score ranges: Most types of FICO and VantageScore credit scores range from 300 to 850. However, credit-based insurance scores might have different score ranges.
• Access to scores: You can easily check your credit scores, but to check your credit-based insurance score, you might need to apply for a new policy or ask an insurance agent if they can show you one of your scores.

Which States Use Credit-Based Insurance Scores?

Most states allow insurance companies to consider a credit-based insurance score when determining whether to approve a new policy, renew a policy, and how much to charge. However, the score generally can’t be the only factor in the decision. Several states also have stricter limits or forbid companies from using credit-based insurance scores altogether.

Auto Policies

• California: Can’t affect eligibility or rates
• Hawaii: Can’t affect eligibility or rates
• Maryland: Might affect rates on new policies
• Massachusetts: Can’t affect eligibility or rates
• Michigan: Might affect installment plan options, but not eligibility or rates
• Nevada: Can’t affect eligibility or rates through May 20, 2024 (for events after March 1, 2020)
• Oregon: Might affect eligibility and rates on new policies
• Utah: Might affect eligibility on new policies and can be used to lower rates

Homeowners Policies

• California: Can’t affect eligibility or rates
• Hawaii: Allowed
• Maryland: Can’t affect eligibility or rates
• Massachusetts: Can’t affect eligibility or rates
• Michigan: Might affect installment plan options, but not eligibility or rates
• Nevada: Can’t affect eligibility or rates through May 20, 2024 (for events after March 1, 2020)
• Oregon: Might affect eligibility and rates on new policies
• Utah: Allowed

Other Factors Used to Calculate Insurance Rates

Even when insurance companies can use credit-based insurance scores, they generally consider other factors when determining your eligibility and premiums. Common factors that affect auto and homeowners insurance rates include:

• Deductibles: A higher deductible generally leads to lower rates.
• Coverage limits: Higher limits generally lead to higher premiums.
• Types of coverage: More coverage comes with higher rates.
• Location: Weather, crime, and other risks can correlate with location.
• Specific characteristics: The type of vehicle you drive or the type of roof your home has could raise or lower your rates.
• Claims history: Your history of filing insurance claims can affect your rates.
• Discounts: Many insurance companies offer various discounts, such as bundling multiple policies or installing a security system.

How to Improve Your Credit-Based Insurance Score

The underlying information in your credit report can affect your credit-based insurance scores and other types of credit scores. You might be able to improve all these scores if you:

• Pay your bills on time: Late payments, past-due accounts, collection accounts, and filing for bankruptcy could all hurt your scores. A long history of paying bills on time could help.
• Pay down loans and credit card balances: Low loan balances and a low credit utilization rate can positively affect your scores.
• Use revolving and installment credit: Having open installment loans and revolving credit accounts might help your scores.
• Apply for credit only as needed: New credit applications may lead to hard credit inquiries, which could hurt your scores.

Your history with credit, measured by the ages of your oldest and newest credit accounts, and the average age of all your credit accounts, can also affect your scores. Opening a new account might affect some of these factors immediately. However, paid-off and closed accounts can continue affecting these age-related factors until they fall off your credit reports, seven to ten years later.

How to Lower Your Rates if You Have Poor Credit

Even if you have poor credit, you may be able to lower your insurance rates by focusing on other factors that can affect your rates:

• Increase your policy’s deductibles
• Lower your policy’s coverage limits
• Remove optional coverage from your policy
• Avoid filing claims if you won’t receive a lot of money or can pay for repairs outright
• Bundle multiple policies from one insurance company
• Purchase security systems that will give you a discount
• Ask about classes, programs, or other ways to get discounts

Although you can’t control all the factors that affect your insurance rates, you can use these ideas to try to lower your premiums or save on a new policy.

Check Your Credit and Compare Insurance Quotes

Checking and monitoring your credit report can help you keep an eye on the underlying information that affects your credit-based insurance scores and credit scores. Even if you live in a state where insurance companies can’t consider your credit history, good credit can be important when you want to get a loan or credit card, rent a home, or apply for a job.

In addition to giving you access to your free credit report and score, Experian members can use the auto insurance comparison feature to get quotes from multiple insurance companies. This can save you time when shopping around for coverage.

At O1ne Mortgage, we are committed to helping you navigate the complexities of credit and insurance. For personalized mortgage services, call us at 213-732-3074. Our team of experts is here to assist you every step of the way.