Insurance scores: How car insurance companies use your credit information


Your credit score could be potentially costing you up to $1,500 a year, but it’s not your typical credit score that’s calling the shots here. Insurance providers aren’t thumbing through the credit scores you’re accustomed to from TransUnion, Equifax, or Experian to determine your insurance rates. Instead, they’re employing a distinct metric known as an “insurance rating score,” often shortened to “insurance score.”

This insurance score has a unique mission – to forecast not whether you’ll make payments late or fall into delinquency, but whether you’ll end up filing a claim on your auto insurance. More precisely, insurance companies are keen on discerning whether your claims’ costs relative to your insurance premiums will deviate from the average. This is, in the words of the credit scoring authority FICO, an endeavor to understand “whether the cost of your claims relative to your insurance premium will be higher or lower than average.”

At first glance, the demarcation between credit scores and insurance scores might seem minor. Both plumb your credit report for data, but the components in this data are weighted differently when calculating the score. Insurance scores, for example, place less emphasis on your credit mix – the variety of credit types you hold, such as mortgages, loans, credit cards, and so forth – and instead prioritize your payment history:

  • Category |Weight in credit score |Weight in insurance score
  • Payment history | 35% | 40%
  • Outstanding debt | 30% | 30%
  • Credit history length | 15% | 15%
  • Pursuit of new credit | 10% | 10%
  • Credit mix | 10% | 5%

Research probing the incorporation of credit into insurance pricing underscores a robust connection between insurance scores and the likelihood of you filing a claim. Yet, the exact rationale behind this correlation remains somewhat enigmatic to insurance experts. The Insurance Information Institute postulates that it may be because individuals who prudently manage their finances tend to service and repair their vehicles before issues necessitate an insurance claim.

Before the 1990s, insurance adjusters pricing policies often had to rely on their personal judgment when insufficient credit information about a customer was available. Consequently, numerous clients found themselves incorrectly categorized with respect to risk, leading to overpayments or underpayments for their insurance policies. The industry embraced insurance scores to eradicate subjective judgments from pricing and apply uniform criteria to all policyholders.

It’s noteworthy that insurance scores solely draw data from your credit report, excluding factors such as age, gender, nationality, ethnicity, address, or income. Nevertheless, depending on your state of residence, your insurer may independently consider some of this information, like age, gender, and ZIP code, for premium calculations. Research has indicated that these variables are valuable in predicting the likelihood of a claim, mirroring the usefulness of insurance scores.

Unlike how banks adhere to federal regulations for credit scores, the utilization of insurance scores by insurance companies is subject to state-level regulations. Consequently, some states impose restrictions on the use of insurance scores in policy pricing, while others permit widespread usage, and some even prohibit it entirely. Each state defines the credit report elements that can be factored into the equation, such as:

  • Your total available credit
  • Disputed items under review
  • Recent hard credit inquiries (e.g., when applying for new credit, not when checking your credit report)
  • Debt incurred from medical providers or hospitals
  • Your credit mix

If you lack any credit history altogether, fret not – state regulations typically mandate insurers to treat individuals with no credit history as average risks. Additionally, remember that insurance scores constitute just one facet of the multifaceted approach carriers take to determine policy pricing.

While the utilization of credit information in insurance pricing sparks debate, comprehending how your insurer employs it can be advantageous in the long term. Feel free to inquire with your carrier about your insurance score and its dependencies on your credit report. Moreover, the more you enhance your credit, the more you stand to save.