What You Should Know About Credit-Based Insurance Scores

In certain circumstances, your insurance rates can be lower than a DUI with a low loan-based insurance. You have a perfect driving record, have never had a lapse in coverage, and are the only person on your insurance. Nonetheless, your car insurance premiums are larger than the total of your utility costs. One possible perpetrator? Having bad credit, or, more precisely, a low credit-based insurance score.

What is the definition of a credit-based insurance score?

Your credit-based insurance score, also known as your insurance credit score, is used to estimate your likelihood of filing a claim. It offers insurers an indication of how much of a risk you are to cover and aids them in determining how much to charge you for coverage.

Credit-based insurance scoring models developed by data analytics firms such as LexisNexis and FICO have shown to be reasonably reliable. According to TransUnion, a 2003 study from the University of Texas found that drivers with the lowest insurance ratings are twice as likely as drivers with the highest scores to submit an insurance claim.

Surprisingly, poor credit might raise your car insurance rates more than a recent DUI in some circumstances. According to Insurezio.com's 2020 rate analysis, rates for drivers with poor credit are 75 percent higher on average than for those with strong credit.

A credit-based insurance score can be used to decide various types of coverage, such as home and renters insurance, in addition to auto insurance. In general, you'll obtain a separate score for each form of insurance, though some businesses, such as LexisNexis, offer ratings that may be utilised across numerous lines of insurance.

While using credit-based insurance scores to compute rates is permissible on a federal level, insurance firms aren't usually allowed to use credit history as the primary reason for raising rates, refusing or cancelling a policy. California, Hawaii, Massachusetts, and Michigan are the four states that have prohibited insurers from using credit scores to calculate prices.

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Insurance score based on credit vs. ordinary credit score

Your insurance credit score is different from that used in applications for mortgages, credit cards or vehicle loans for VantageScore, or FICO credit score.

The elements utilized to determine your score, however, remain the same; they are only weighted differently. This is because a credit score is intended to assess the likelihood that you will pay your bills, whereas a credit-based insurance score considers the likelihood that you will file an insurance claim. Because a credit-based insurance score can be issued by more than one organisation, your rating may fluctuate from one to the next. The greater your score, regardless of the organisation, the better.

The factors utilized to generate a credit-based insurance score are comparable for LexisNexis and FICO, although their weighting may differ. According to the National Association of Insurance Commissioners (NAIC), the following is a breakdown of how FICO weighs insurance credit scores:

• Payment history (40%): How you paid off your debt in the past, including the frequency and quantity paid off.

• Outstanding debt (30% )*: The total amount of debt you owe.

• Credit history duration (15%): The amount of time you've had a line of credit.

• Pursuit of new credit (10% ): Determines whether you have lately applied for new lines of credit.

• Credit mix (5%): The many types of credit you have, such as credit cards, mortgages, and vehicle loans.

According to the categories listed above, the following may have a negative impact on your insurance credit score:

• Payments are not being made.

• Having no or little credit history.

• There are just too many hard credit queries. (When you apply for a car, student or personal loan, mortgage, or credit card, your credit is pulled.)

• Credit usage is the percentage of your credit card balances that exceed your credit limit.

Personal information, like a standard credit score, cannot be utilised to generate your credit-based insurance score, including:

• Gender.

• Race.

• Marital status.

• Religion.

• Age.

• Earnings and occupation

• Residence location

Although your credit score and credit-based insurance score are not the same, your credit score can be used to predict your credit-based insurance score. If you have good credit, your credit-based insurance score is probably (but not always) comparable.

What constitutes a "good" insurance credit score?

It's difficult to establish a "good" credit-based insurance score because each firm has its own definition of what constitutes a "good" score. For example, one insurance company may determine that a score of 750 or higher unlocks the lowest vehicle insurance prices, whilst another may require a score of 700 or higher to achieve its best pricing. And, because credit scores are derived from multiple credit-reporting agencies, those figures will not always be measured on the same scale.

To give you an idea of the ranges, LexisNexis offers credit-based insurance scores ranging from 200 to 997 through credit bureau Experian. Here is an example of LexisNexis website scores and rankings:

• Good: 776-997.

• Average: 626-775

• Below average: 501-625.

• Less desirable: Under 500.

According to TransUnion's website, a "good" credit score is roughly 770 or higher.

Average vehicle insurance premiums for those with bad credit

Although insurers differ on what constitutes a "bad" insurance credit score, in the case above, a credit score of 625 or lower would be deemed poor credit. The following are the average vehicle insurance prices for a driver with bad credit:

• Full coverage costs $2,506 per year.

• Minimum coverage costs $1,078 per year.

In comparison, the typical vehicle insurance premiums for a good driver with good credit are $1,080 lower for full coverage and $471 lower for minimal coverage.

Do all car insurance companies utilise credit-based insurance scores?

For a variety of reasons, the use of credit to calculate insurance prices has come under investigation. According to criticism, auto insurance is unreasonably priced because it cannot foretell the danger of accidents for drivers. There is also a general lack of understanding about the use of credit-based insurance scores to set insurance rates, and consumer advocates have spoken out against the use of credit information to set rates. Credit checks are being phased out by some businesses. Root Insurance has pledged to remove credit scores from its pricing model by 2025, and Dillo offers no-credit-check car insurance quotes in Texas.

Nonetheless, according to FICO, approximately 95 percent of auto insurers use an insurance credit score to determine car insurance rates, so depending on where you live, you may have no choice. But that doesn't mean you have to keep paying the current rate. Even if you have bad credit, shopping around for car insurance quotes can help you find lower rates.

Which firm offers the best prices for good drivers with bad credit?

Geico provides the best rates for good drivers with bad credit out of the seven top auto insurers in the United States on average. (Our "good driver" profile is a 40-year-old man with no moving infractions and "good" credit.)

These are the rates for full coverage insurance that include liability, comprehensive, collision, uninsured/underinsured motorist protection, and any other state-mandated coverage.

Annual vehicle insurance prices for good drivers with good and bad credit, as averaged across all states, are as follows:

Car insurance prices for bad credit drivers vary by state.

How to Improve Your Credit Score and Get Cheaper Insurance

Here are a few credit-building tips:

• You must pay your bills on promptly. One of the best methods to enhance credit is to have a history of making on-time payments.

• Clear your credit card debts. Make every effort to pay off any credit card debt as soon as possible without going over budget.

• Reduce credit card balances. There will be occasions when you will need to utilise your credit card to pay for necessities. Still, aim to keep your amounts as low as possible – Insurezio.com recommends keeping your balances under 10% of your overall credit limit.

• Keep harsh credit queries to a minimum. Hard credit pulls, such as those needed to establish loan or credit card eligibility, may temporarily reduce your credit ratings. Allow at least six months between applications.

• Determine your credit-based insurance score. To find out why you earned your score, contact the firm that created it. While obtaining your credit-based insurance score is not as simple as obtaining your other credit scores, it is still doable. Some insurers will provide contact information so you can learn more about your credit score, especially if your vehicle insurance quote was influenced by your credit.

• You should obtain a copy of your credit report. If you can't find your credit-based insurance score, get a copy of your credit report. The Fair Credit Reporting Act permits you to acquire a free credit report from each of the three consumer credit reporting organisations every 12 months. These companies are Experian, Equifax, and TransUnion. Throughout the pandemic, users can acquire a free credit report every week until April 2021. Insurezio.com can give you with a free TransUnion credit report; AnnualCreditReport.com can provide you with Experian and Equifax reports.

Your report contains your:

• Data for identification.

• Payment history.

• Accounts have been opened.

• Accountancy age.

• Recently conducted hard credit queries.

• Revolving credit and medical debt

• Balances.

• Credit limits.

• Personal information such as your job title and address.

You can use this information to determine what factors are influencing your credit score. Because credit-based insurance and credit scores use the same information in different amounts, any of the following activities will have an impact on both scores:

Request that you be added as an authorised user. If you have a close friend who has a seldom used, established credit card account, preferably with a large credit limit, request that they add you as an authorised user. Being added to their card may aid in the development of your credit.

Understand your legal rights. When it comes to utilising credit to establish insurance prices, state rules vary. To learn more about the rules, contact your state's insurance department.

Other strategies to save money on auto insurance if you have a bad credit history

If you have bad credit, improving your insurance credit score will likely lower your insurance premiums, but there are other methods to save.

Look around. To discover the cheapest vehicle insurer, compare car insurance quotes. Even if you have bad credit, you may be able to locate a better deal than you are currently paying. This is due to the fact that each organisation weighs factors differently. Although one firm may hike your rate by 10% for bad credit, another may only raise it by 5%.

Poor credit affects insurance prices, but looking around has no effect on your credit score because there is no hard credit draw while comparing vehicle insurance quotes.

Your insurance credit score is especially crucial when purchasing a policy for the first time with a firm. Most firms will examine your credit score when you are a new customer to assist compute car insurance prices. Companies vary in when they verify your score after your initial policy, according to P.J. Smith, senior director of product management at LexisNexis Risk Solutions.

Some vehicle insurers will verify your credit-based insurance score every time you renew your policy, while others will only do so on rare occasions. The frequency with which your insurance credit score must be reviewed is also determined by state legislation.

This implies you shouldn't think you're getting the greatest rate simply because your credit has improved. Shop around to ensure you're getting the best deal. Young adults, recent immigrants, and anyone without a credit history can all benefit from comparing car insurance rates.

Insurance based on usage. If you're an excellent driver, you might be able to save money on auto insurance by opting for usage-based coverage. Usage-based policies still examine characteristics such as location and age, but driving behaviour is also taken into account when calculating your auto insurance quote. Driving habits such as speeding and harsh braking are typically collected using a plug-in device or a smartphone app. Root specialises in usage-based insurance, and some traditional insurers, such as Progressive, also provide it.

Insurance based on the number of miles driven. Unlike standard insurance, the premiums for this type of policy are determined by the number of miles driven each month. A plug-in gadget or smartphone app is typically used to calculate this. If you work from home or don't drive frequently, this may be less expensive than typical insurance. Some companies specialise on this sort of insurance, such as Metromile, while a few large insurers, such as Nationwide, also provide a per-mile alternative.

Make a request for a LexisNexis report. Your insurance credit score is merely one of several factors that go into determining your vehicle insurance quote. Driving records and insurance history are also important considerations. Your Comprehensive Loss Underwriting Exchange, or CLUE, the auto report provides insurers with information about your driving and insurance history. CLUE is a package of data that LexisNexis sells to vehicle insurers in order to assist them to approve clients and determine premiums. On its website, you can request a free full file disclosure, which includes copies of numerous reports that LexisNexis creates about you, such as your CLUE auto and property reports.

Frequently asked questions

Is it true that seeking insurance quotes affects your credit score?

No, there is no "hard credit pull" when you acquire a vehicle insurance quotation, therefore shopping around will have no effect on your credit score. When you apply for credit, such as a mortgage or credit card, a hard credit draw is performed.

Is a credit score the same as an insurance score?

A credit-based insurance score and a conventional credit score are not the same, even if they both consider similar elements, such as your payment history. Insurance credit scores are used by insurers to determine how likely you are to file a claim, with a low score often resulting in higher insurance costs.

What is a decent credit score for insurance?

Unfortunately, there is no simple solution. Each insurer determines what constitutes a "good" credit-based insurance score, therefore figures may differ. Your standard credit score, on the other hand, can often offer you an idea of how "excellent" your insurance score is.