Many consumers don't realize that portions of their credit report can have a substantial influence on their insurance premiums. Yet, a large majority of U.S. insurance companies take your score into account.
When discussing data provided by FICO, the National Association of Insurance Commissioners said that in the 47 states where it's legal, 95 percent of car insurance providers and 85 percent of homeowners insurance providers consider credit-based insurance scores as a factor in determining premiums.
Why use credit scores?
Use of credit scores in determining insurance premiums is a relatively new phenomenon. It began in the 1990s after insurance companies noticed a correlation between credit scores and claim filings. It quickly became standard practice to use credit scores as a way to predict a person's likelihood of filing a claim.
The implementation of this practice has been a contentious issue, as many consider it unfair that, for something like auto insurance, a poor credit score could raise your premium more than a poor driving record. According to Bankrate, those with bad credit could pay between 20 and 50 percent more for auto insurance than those with good credit.
Credit-based insurance scores versus standard credit scores
The way insurance companies create a credit score is often vastly different from the standard three-digit score to which you have probably grown accustomed. Unfortunately, insurance companies are not required to release the score they calculate for you, so it can be difficult to understand exactly what's important. While each insurance company can create a score however it wants, FICO's insurance scoring factors in the following:
- Previous credit performance – worth 40 percent
- Current level of indebtedness – worth 30 percent
- Length of credit history – worth 15 percent
- New credit/pursuit of new credit – worth 10 percent
- Types of credit use – worth 5 percent
The FICO scores do not take into account personal information such as religion, age, address or salary. In addition, shopping around for different rates will not affect your credit-based insurance score. While loan inquiries will show up on your credit report, insurance ones will not.
"A poor credit-based insurance score will not sentence you to a lifetime of high insurance premiums."
How to keep your credit score strong
It may seem hard to figure out how to keep your credit-based insurance score high if insurance companies won't share it with you, but what you do know is they are using some mix of factors from your credit report. So, if you keep your credit report in good shape, your credit-based insurance score should be in good shape, too. NAIC said you can improve your credit-based insurance score using the same strategies you would to improve your standard credit score. There are no tricks or shortcuts. It's about keeping up with your payments and remaining financially responsible.
FICO explained that a poor credit-based insurance score will not sentence you to a lifetime of high insurance premiums. If your credit score improves over time, it will be possible to have your rates lowered. According to Consumer Reports, it is against the law for insurers in California, Hawaii and Massachusetts to use credit scores to determine insurance rates, so if you live in these states you should focus on other factors, such as maintaining a safe driving record, to help improve your rates. Of course, other factors are used to determine premiums in states that use credit-based insurance scores as well. Credit score may be a large element, but it is certainly not the only one.