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While most people know credit scores are used by lenders to assess a potential borrower’s risk, that’s certainly not the only use of scores. Credit scores are also commonly used by insurance companies to assess the insurance risk of a consumer who applies for new coverage or is being considered for policy renewal.
And while the term “credit score” is often used to describe the scores available to and used by insurance companies, credit-based insurance scores are very different from the garden variety FICO® and VantageScore® credit scores. The differences between credit scores and insurance scores can include the data used to calculate them, who uses the scores and for what reasons and how consumers can access the scores.
What Is a Credit-Based Insurance Score?
Credit-based insurance scores, also simply called insurance scores, are designed to predict either the likelihood that you’ll file an insurance claim or that you’ll be an otherwise less profitable insurance customer. Insurance scores can take into account not only your credit report information but also your insurance claim history. And much like how standard credit scores affect your borrowing rates, a better insurance score can likely result in better insurance premiums and rates.
There are different types of insurance scores, just as there are different types of credit scores. FICO® creates insurance scoring models as well as credit scoring models. LexisNexis also builds insurance scores, called Attract scores.
Many insurance companies use insurance scoring systems as a part of their risk assessment methodology, which typically contains many risk-assessing attributes. And while the use of credit reports to determine insurance risk is completely legal at the federal level, some states do restrict the practice.
What Factors Into an Insurance Score?
Standard credit scores and insurance scores are often influenced by similar credit report information. For example, FICO®‘s insurance scores could increase based on the following credit behaviors:
- Making payments on time and avoiding negative information such as defaults and collections
- Maintaining low balances on your credit cards
- Having a well-established history of using credit
Conversely, FICO®‘s insurance scores could decrease due to the following behaviors:
- Missing payments and having a record of accounts in collection status
- High credit card balances relative to credit limits
- Frequent credit applications, which means having many hard inquiries
If this sounds like the familiar advice you normally hear regarding how to earn a solid credit score, you’re right: According to FICO®, there is a “proven correlation between credit data and insurance loss.” This means the information on your credit reports is proven to be predictive of the type of insurance customer you’re likely to be. Proper credit management means not only better credit scores but also better insurance scores.
How Are Your Credit Scores Different From Your Insurance Scores?
Credit scores and insurance scores, while often considering the same credit report information, are not designed to do the same things. Credit scores are designed for one purpose: to predict the likelihood that you’ll go at least 90 days past due on any credit obligation in the 24 months subsequent to your score being calculated.
Insurance scores, on the other hand, are designed to predict one or both of the following:
- Whether you’re likely to file an insurance claim
- Whether you’re likely to be a profitable insurance customer
In either case, the insurance company needs to know if the premiums for coverage are likely to exceed the cost of any claims you might file, and by how much. This is referred to as the “loss ratio” of an insurance customer.
Another considerable difference between credit scores and insurance scores is the ability for insurance scores to consider your insurance claims history and driving record. If you get into an accident and file a claim to get your car fixed, this information will not appear on your traditional credit reports. As such, your credit scores as calculated by FICO® and VantageScore’s credit scoring models will not be impacted.
Insurance scoring models, on the other hand, can consider claim information, the safety features of your home and automobile, the insured’s demographic information, and auto usage information, such as how many miles you drive annually. None of this is considered by credit scoring models.
Other differences include the score ranges and consumer access to insurance scores. While most credit scores range from 300 to 850, the commonly used LexisNexis Attract insurance scores range from 200 to 997. FICO® insurance scores range from 100 to 900. Neither the FICO® nor LexisNexis insurance scores are available to consumers.
Other Factors That Can Influence Your Insurance Premiums
In addition to credit report information and your insurance credit scores, information about your previous insurance claims can also be considered by insurance companies and insurance scores. This information is collected, stored and delivered to insurance companies by LexisNexis. The LexisNexis database containing information about your auto and homeowners claims is called the Comprehensive Loss Underwriting Exchange (CLUE) database.
If you’ve filed an auto or homeowners insurance claim in the past seven years, that information is likely to be included in your CLUE report. And because the CLUE report is legally considered a consumer report by the Fair Credit Reporting Act, you can check your auto and homeowners CLUE reports for free once every 12 months through LexisNexis. Only claims filed in the past seven years will show up on your CLUE reports.
Other factors that can influence your auto and homeowners insurance rates include your age, gender, your marital status, the type of car you drive, where you live and the value of your home. The deductible amount on your insurance policy will also influence your insurance premiums.
How to Improve Your Credit Scores
You need to know what’s on your credit reports before you can improve your credit scores. You can get your free credit report through Experian; in addition, through April 2021, you can get free copies of your credit reports every week from all three of the major credit reporting companies (Experian, TransUnion and Equifax) at AnnualCreditReport.com.
To improve your credit scores, pay attention to these factors:
- Payment history: Both FICO® and VantageScore credit scores are heavily influenced by the presence or lack of negative information on your credit reports. In fact, that category is worth about a third of the points in your scores. If you can avoid negative information, you’re well on your way to great scores. The best way to do that is to make all your debt payments on time, every month.
- Debt management: Another roughly one-third of the points in your scores is determined by debt-related metrics. This includes how much debt appears on your credit reports, how many accounts you have with balances, and your credit utilization, which measures your balances relative to credit card credit limits and original loan amounts. The less debt that appears on your credit reports, the better for your credit scores.
- Inquiries: An inquiry is a record of entities, usually lenders, accessing your credit reports. Inquiries can temporarily lower your credit scores by a few points. It’s best to apply for credit sparingly to limit the number of inquiries.
Managing Your Insurance Scores
Putting another set of scores on your radar doesn’t necessarily mean you have to change your existing credit management practices to earn and maintain great insurance scores. Because both credit scores and insurance scores are largely influenced by the same information in your credit reports, the advice regarding score improvement is applicable for both score varieties.
If you can avoid negative credit information and excessive credit card debt, you’re well on your way to earning great scores. If you can also, to the extent possible, avoid filing both auto and homeowner claims, that will also help to ensure your insurance premiums are as competitive as possible.