Posted by William Charles on October 11, 2017
Credit Scores

Published on October 11th, 2017 | by William Charles

41

Everything You Need To Know About Insurance & Credit Scores

This is a guest post by Parker Bonnell of Honest Policy. As we mention in the outro insurance credit scores is something we’ve been meaning to tackle for some time so it’s always great when we can get somebody who is an expert to help with content specific to that niche. 

Introduction

One thing that many people don’t know is the affect your credit can have on your insurance. In most states, your credit score can play a larger role in the price of insurance than many other factors do. If you didn’t know that, you’re not alone. About two-thirds of Americans are similarly unaware, according to a study conducted in 2005 by the Government Accountability Office.  On the flip side, having or paying for insurance does not have much effect on your credit score, with the exception of not paying your bill on time (total payment history accounts for 35% of your FICO score).

Will an insurance quote affect your credit report?

No. The credit check that occurs when you apply for insurance is not like when you apply for a new credit card either. While they will show up on your personal credit report, they are not provided to lenders, so will not be considered when calculating credit scores. This is confirmed by Experian here.

Will your credit affect your insurance premiums?

In most States your credit report/score can be used by insurers to determine the premiums you should pay (the exception being health insurance where this is prohibited at a Federal level). If your credit information is having a negative effect on your insurance price then under the Fair Credit Reporting Act insurers are required to you a notice of adverse action. Generally a notice of adverse action is required if any of the following happen as a result of your credit:

  • Insurance is denied
  • Rates are increased
  • Policy is terminated

If you’ve ever been denied for a credit card then you should be familiar with these notices of adverse action. Unfortunately unlike card issuers these notifications can be hard to spot. One can see rough estimates of credit’s effects on prices for multiple insurers in each state by using the credit tool over at Honest Policy.

What States are exempt?

Some States do not allow insurers to use credit information to determine your insurance premiums. These restrictions vary based on the type of insurance and are outlined below.

Auto

Credit affects your insurance premium unless you live in California, Massachusetts (according to this comment it can still be somewhat used), or Hawaii. If you are in one of the other 47 states, the cost of insurance for someone with poor credit can be more than twice that of someone with great credit.

Home

Here the only exceptions are Maryland and Hawaii. In other states, the insurance price difference between low and high credits can be even more significant than for auto.

Life

With life insurance, your credit score typically has little effect on the price of your premium, unless you’re going through bankruptcy (or have gone through it recently). The reason bankruptcy proceedings may be lead to a denied application or higher prices is because of the insurers worry that you won’t be able to pay your premiums.

Health

Credit has zero effect on your health insurance prices. Due to the ACA, the only things that affect the price of this is your location, age, and whether you smoke.

Renters

According to the comments it should just follow the same exceptions as home insurance.

Credit score exception

In some states including Delaware, Iowa, Rhode Island, Connecticut and Nevada, you can apply to your insurer for a credit score exception if your score has suffered as the result of an “extraordinary” life event. If approved, your insurer will provide a policy quote that doesn’t take into account your poor credit (which should be far more affordable). Such events generally include the following:

  • Catastrophic events, as declared by the Federal or State Government
  • Serious illness or injury of yourself or an immediate family member
  • The death of a spouse, child or parent
  • Divorce or involuntary interruption of legally-owed alimony or support payments
  • Identity theft
  • Temporary loss of employment for 3 months or more if resulting from involuntary termination
  • Military deployment overseas
  • Other events, as determined by the insurer

Other states where exemption requests are reportedly available are Colorado, Florida, Louisiana, Montana, New Mexico, Texas, and Virginia. It is plausible that other states have since enacted similar provisions however. The easiest way to check would be to contact your insurer and ask about the possibility. If you find out your state has them, let us know in the comments, and we can update accordingly.

Why do insurers use credit for insurance prices?

It might seem odd that an insurer would use your credit score for determining the price of the policy premium. With auto insurance for example, why assume that someone who has a low credit score is therefore a riskier driver who warrants higher prices? Well, according to a few studies there is greater likelihood that someone will make an insurance claim if they have poor credit. At least one of these studies found that the use of credit scores for pricing had a disproportionate impact on certain minorities (primarily Latinos) and low-income individuals.

Insurance Credit Scores

A popular misconception is that insurers simply use a standard credit score (such as FICO or VantageScore). But they actually use industry specific scores called insurance credit scores. Reports indicate that they focus on certain key factors that are similar to how traditional credit scores are calculated but with different weightings. Credit Karma offers a tool that provides at least one estimate of your insurance score (via Transunion called auto insurance score) if you’re looking for an idea of where you stand. Keep in mind though that there is a difference between “educational” scores such as these, and your “true” scores.

For auto insurance there are three major insurance credit score systems (unless the insurer is using their own in-house formula):

  • FICO Auto Score 9 XT
  • LexisNexis AttractAuto Insurance Score
  • CreditVision Auto Score

The FICO 9 XT Score for example looks particularly carefully at the past 30 months of an applicant’s history. It also ignores accounts from collection agencies that have been paid off (as does the CreditVision Score), and differentiates between unpaid medical and non-medical bills that have gone into collections. This means that if you’ve been working on improving your score lately, and have paid off your debts, it will have a more significant impact than it would for a traditional credit score.

Insurance Score Ranges

As mentioned, the insurer may have their own scoring system where the range isn’t available to consumers. If they’re using one of the three systems mentioned above though, the ranges are as follows:

  • FICO | 250-900
  • LexisNexis | 500-997
  • CreditVision | 300-850

What is a good insurance score?

Experian reports that the categories for FICO are:

  • Excellent is 800+
  • Very Good is 740-799
  • Good is 670-739
  • Fair is 580-699
  • Poor is 579 or less.

According to LexisNexis their scores are as follows:

  • Good is 776-997
  • Average is 626-775
  • Below Avg. is 501-625
  • Poor is less than 500.

TransUnion doesn’t provide a guide, but their CreditVision score uses the same numbering system as a traditional credit score, where presumably the same categories apply:

  • Excellent is 750+
  • Good is 700-749
  • Fair is 650-699
  • Poor is 550-649
  • Bad is less than 550.

Final Thoughts

Thanks to Parker for putting together this post, it’s been something I’ve been meaning to write about for a long time but I’ve never found the time or known enough about it to do it justice. I think this is a great jumping off point and I’m confident as readers share their own knowledge and data points we can make this post a useful resource page.

If you found this post helpful then check out Honest Policy, they provide tools and data to help pair consumers with the right insurance carrier for them. The best carrier for a single guy with poor credit but a nice car is not the same as someone with a family of 4 who is a homeowner but has a DUI. Our goal is to inform the consumer how to get the most value from the 2-3 carriers that are the best potential match for them. They also have a blog you can check out here.



41 Responses to Everything You Need To Know About Insurance & Credit Scores

  1. Don says:

    Good read and very useful info. I’m moving to CA next year so it’s interesting to know that they don’t factor Scores. I hope that doesn’t mean a higher average.

    Also in the “Why do insurers use credit for insurance prices?” section, you missed the letter ‘I’ at the very beginning when you copied it.

  2. PT says:

    Some additional corrections:

    One thing that many people don’t know is the affect your credit can have on your insurance
    affect should be effect

    As we mention in the outro insurance credit scores
    outro should be auto

    Some States do not allow insurers to use credit information to determine your insure premiums
    insure should be insurance

    • Maria says:

      There are many more spelling, grammatical, and punctuation errors in the article. If the author can’t get the simple things right, why should anyone bother?

    • No, outro should be outro. I mean the opposite of intro. Made the other changes, thanks.

      • PT says:

        Oh OK! Learn something new everyday!

        I don’t usually point out minor errors on DoC, but I will sometimes when I think it is needed for readability or clarity so it will help more people understand.

        I greatly appreciate the content on DoC on a regular basis, so keep up the great work! As you say, the benefit of the substantial content overshadows the minor errors.

        Thanks again for all your efforts!

        • I appreciate the heads up when readers let us know about errors, I’m always happy to fix them so thanks for that. I just don’t like it when people complain but don’t offer any suggestions on improvement and act like we have committed a war crime for not using a comma properly (you don’t do this).

  3. Paul says:

    Renters would follow the same state exemptions as Home, as it is just a basic form of a homeowner’s policy (HO4 vs. HO3). Our carriers definitely take credit into consideration for renter’s insurance.

  4. Bret says:

    Renters insurance follows homeowners with the use of credit scores. Also, Connecticut has an “elc” or extraordinary life circumstance exemption.

  5. Jhon D says:

    Very nice explanation of all factors, thank you very much

  6. John says:

    Although MA doesn’t allow “rating” based on your credit score, having a worse score can cause you to have higher rates. This is because of the poorly worded/instituted rule at the Massachusetts Department of Insurance which allows companies to look at your credit score and then place you with a different “company” within their institution.

  7. Bhanna says:

    This is why I love this site… provides detailed helpful information about necessary components of life so tat you can try to optimize what you are doing…

  8. James B. says:

    Interesting article, thanks Doc!!!!!!!!

    Prices between insurance companies vary dramatically, so shop around. Many insurance companies will provide a significant new customer discount and then gradually raise their rates. This is called customer acquisition cost. So it is important to get quotes every 1-2 years from other insurance companies.

    Insurance providers like Geico and Progressive spend a lot of money on advertising which their customers end up paying.

    An interesting follow-up article would be on a rating on how difficult it is to receive compensation on claims for different insurance companies.

    • Dave says:

      Consumer Reports did a review recently of auto insurers, including claims data.

      As for Geico and Progressive advertising, they don’t have captive or independent agents. Or those high commissions to pay out!

      • James B. says:

        Hi Dave,

        Can you give a summary of the top five auto insurers in terms of claims?

        From online research tools, Geico and Progressive are not in the top five in terms of price competitiveness for auto insurance.

  9. Abey says:

    Amazing post!

  10. Harry Nguyen says:

    Hey I just got a call with a debt settlement company a few days ago, the rep also recommend getting credit life? Never heard of it but it seems interesting, do you guys know about that?

    • Kalvan says:

      Credit life is usually a policy on a specific line of credit. Usually premiums are based on a percentage of the balance owed.

      Unless you are unisurable for a term life policy and you have other assets that you want to be able to pass to an heir(that don’t have a debt exception, like a term policy that passes outside of probate directly to the beneficiary) I would recommend not giving it another thought.

      TLDR: Rip Off Alert, Stay Away

  11. DaWoodMan1 says:

    This must be one of the single best articles that I have read on DoC. Don’t get me wrong, I love all the CC sign-up bonuses and travel rewards posts, but in terms of super important life stuff, this article is great. I knew credit scores affected insurance costs and because of DoC, other resources and sound financial planning, my credit score is great. But still it is remarkable to see the way consumers are at the mercy of some parts of their lives that are out of their control and other parts of the world that affect them without having any control at all.

  12. DaWoodMan1 says:

    Obviously Hawaii isn’t the greatest state but it is nice to know that HI state law forbids using credit scores across all of the insurance types! Aside from the great weather, that is one other great thing about HI in comparison to some of the other states in the union. Now if I could only find a job that would require me to relocate there 🙂

  13. PD says:

    So we were informed our auto premiums were going up because of a change in our credit score. They particularly noted an increase in overall balance/loan, so I’m guessing it’s because of a car loan we took out. We could pay off the loan tomorrow if we wanted… But is there a way to get the insurance company to pull the credit score again and then have our rates improve?

    • Parker B says:

      I’m not sure what state you live in, but in some states at least, you are entitled to request your insurer to re-check your credit score once per year. Maryland is one example of this: http://insurance.maryland.gov/Consumer/Documents/credithistoryauto.pdf

      Your best bet would be to simply call the insurer and ask. Short of that, they should do a new check on your credit when your policy renews.

      • PD says:

        Thanks so much! I looked up my state and they are required to recheck every 3 years, but you may request (and they are obligated to check and adjust tier and/or premiums) annually at renewal. We will pay off our very low interest loan by the next renewal and I’ll have them recheck. Makes me wonder if the loan was worth the extra $200 on our policy this year…I suppose so, since it gave us the cash to move around for a bunch of bank bonuses.

  14. Sarah says:

    According to Credit Karma my auto insurance score is “fair” and my property insurance score is “very good.” What could cause the discrepancy?

  15. Curmudgeon says:

    When my insurance agent told me about this many years ago, I was confused about the link between insurance rates and credit scores. I figured my car insurance ought to be determined on the type of car and driving record, but he explained that the insurance companies had found that people with poor credit simply made more claims.

    After thinking about it a bit, it made a lot of sense. If you’re completely broke and can’t make your car payment (and maybe upside down on the loan), it would be easier to “sell it to the insurance company” by letting the car get stolen or driving it into a tree than risk a repo.

    I think the states that prohibit using credit scores for insurance rates help those with bad credit (undeservedly) and stick it to the people with good credit.

    I’ve worked hard for good credit – why should I have to pay the same rate as someone who’s never paid a bill on time in their life?

  16. kirk says:

    i read somewhere before that credit affects your car insurance premium but i did not know that living in CA that didn’t matter. i was actually gonna ask Allstate to re-evaluate my policy around the turn of the year and was gonna point out my exceptional credit score. O.o oops!

  17. Bill M says:

    My homeowners and auto insurance are currently up for renewal (both are with the same company). The following is taken directly from the renewal notice:

    Your rate was determined in part by your insurance score. Had your score been higher, you may
    have qualified for a lower rate. The following characteristics influence your score:

    Presence of an Account Reported as 30 Days Past Due – Industry research shows that consumers with a delinquent payment history on their accounts experience more insurance losses. Our score considers if any accounts on your credit report have been reported as 30 days past due. To improve this aspect of your score, avoid letting accounts get to a delinquent status and pay your delinquent accounts as soon as possible to avoid accounts becoming more seriously delinquent. In order to achieve the best rating, there must be zero accounts reported as 30 days past due on your credit report.

    Number of Accounts Reported Within 6 Months – Industry research shows that consumers with a large
    number of reported accounts have more insurance losses. Our score considers the number of accounts reported by your creditors within the last 6 months. To improve this aspect of your score, open new accounts only when needed.

    Age of Newest Account – Industry research shows that consumers with recently opened accounts
    experience more insurance losses. Our score considers how long it has been since you opened your last account. To improve this aspect of your score, consider keeping your oldest accounts active and only open new accounts when needed. In order to achieve the best rating, the age of your most recently opened account must be at least 3 years old.

    Number of Inquiries Within 24 Months – Industry research shows that consumers who are looking to
    obtain new credit accounts have more insurance losses. While not all applications or inquiries initiated
    by you will result in an account opening, it is an indication of a possible increase in credit obligation.
    Our score considers the number of inquiries initiated by you to obtain credit within the past 24 months.
    To improve this aspect of your score, apply for credit only when needed. In order to achieve the best
    rating, there must be no more than 1 credit inquiry within the past 24 months on your credit report.

    Age of newest account must be at least 3 years old and no more than 1 inquiry in last 24 months — this is ridiculous!

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