An insurance score (sometimes called an insurance credit score) is one of the factors insurers may use when deciding how much money to charge you for your car or homeowners insurance policy. Your insurance score is based on items from your credit history, such as your record of making payments and your current consumer debt.
A higher insurance score, which indicates an average or above-average credit history, will help you earn a lower insurance premium. Conversely, a lower insurance score may result in a higher insurance premium.
It’s worth noting that your consumer credit and insurance scores are not the same thing. Both are based on information from your credit report, and both are confidential. But your credit score (which your lender looks at when you apply for a mortgage, for instance) predicts the likelihood of your being delinquent on a loan. Your insurance score predicts the likelihood that you’ll file an insurance claim.
Why do insurers use insurance scores?
Insurance is one of the few things for which the exact cost of providing the product (a policy) is unknown until after that product is sold.
Think about it: A computer manufacturer knows their exact cost to provide you with a PC. This includes the cost of parts, assembly, shipping, marketing, and so on. This cost is reflected in the price you pay.
But your insurance company doesn’t know its exact cost to provide you with a policy — at least not when you buy it. This is because the company doesn't know how much money it’ll need to settle any claims you have until after you’ve paid your premium.
The best your insurance company can do is to predict the likelihood you’ll file one or more claims and how much it’ll cost to settle those claims. It then uses that prediction to help determine what you should pay in premium.
Insurers figured out long ago that certain aspects of a person’s credit use correlated strongly with their likelihood of filing a claim. People with average or above average credit were less likely to file claims. In contrast, people with poor credit were more likely to file. This correlation has been confirmed through multiple independent studies, including research by the University of Texas at Austin and the Federal Trade Commission.
Insurance scores were pioneered in the 1990s and are now used by 95% of U.S. personal lines insurance companies, according to Fair, Issac Corporation (FICO).
How is an insurance score calculated?
Some insurance companies access your credit information and use their own methodology to calculate your insurance score. Progressive, for instance, states that their method incorporates credit information along with some accident and insurance claim history.
Other insurers simply purchase standardized insurance scores from data providers such as FICO and LexisNexis.
FICO identifies five general areas of predictive information in insurance scoring and their overall impact on a person's score.
- Previous credit performance (40%) — This includes your payment history, delinquencies, and past due amounts.
- Current debt (30%) — This is the total amount you owe on all your credit accounts and loans.
- Length of credit history (15%) — This includes the age of your oldest credit account and the average age of all your credit accounts.
- Pursuit of new credit (10%) — This is your number of recently opened credit accounts and loans.
- Credit mix (5%) — This is the presence, frequency, and recency of information on various types of credit accounts, including credit cards, retail accounts, installment loans, mortgage, and consumer finance accounts.
How can you check your insurance score?
Each insurance score provider uses a different scoring scale. According to WalletHub, FICO scores range from 250-900, with scores above 700 qualifying for their “good” range. LexisNexis uses a 200-998 point scale, with scores above 776 qualifying for their “good” range.
Unfortunately, your insurance score is not as easy to access as your consumer credit score. FICO does not make scores available to consumers. LexisNexis reportedly does, though you have to call the company to get it. You can also try contacting your insurance company to see if they’ll allow you to check your score.
How to improve your insurance score
If you know (or suspect) that your insurance score is negatively affecting your policy premiums, there are some things you can do. The National Association of Insurance Commissioners recommends these strategies:
- Remember that insurance scores reflect payments over time, emphasizing recent information.
- Pay your bills on time, and catch up on any missed payments.
- Keep balances low on credit cards and other revolving credit.
- Minimize the frequency with which you apply for new credit.
- Check your credit report annually, and alert the credit bureau if you find any incomplete or incorrect information.
Frequently Asked Questions: Insurance credit scores
Are insurance scores legal?
The use of insurance scores is legal in most states. However, the practice is controversial, and some states have limited or banned it outright. Currently, California, Hawaii, and Massachusetts forbid insurers from using credit in car insurance. California, Maryland and Massachusetts ban its use in homeowners insurance. Several other states have laws limiting the use of insurance scores.
What information is not part of an insurance score?
Insurers do not use information such as income, ethnic group, age, gender, disability, religion, address, marital status, or nationality when calculating an insurance score.
Why does my use of credit predict my likelihood of filing a claim?
According to the Insurance Information Institute, there’s no complete agreement among the experts as to why credit correlates to insurance claims. One possible answer is that people who take greater care to manage their finances tend to do the same with other aspects of their lives. They take their car in for service regularly and take care of minor issues around the house before they turn into major repairs (and costly insurance claims).