The Difference Between Credit-Based Insurance Scores & Credit Scores

You might have expensive premiums for health, life, or even auto insurance and it might even be starting to take a toll on your wallet. It’s most likely your credit-based insurance score that’s raising your prices. What could be one way to decrease the costs of these plans?

Credit scores are most commonly used by lenders to assess a potential borrower’s risk. However, that is not the only use of our scores. Credit information is also commonly used by insurance companies of all types, such as auto, health, and life insurance. They used your credit report to assess the insurance risk of a consumer who applies for new coverage or is being considered for policy renewal.

What Is a Credit-Based Insurance Score?
A credit-based insurance score is a rating based in whole or in part on a consumer’s credit information. Credit-based insurance scores use certain elements of a person’s credit history to predict how likely they are to have an insurance loss.

An insurance company might use credit-based insurance scoring models as one of the many attributes included in its risk-assessment methodology. This practice is completely legal at the federal level, but some states do restrict the practice.

How Is a Credit-Based Insurance Score Calculated?
The factors used to determine your score are the same as your regular credit report, just weighted differently. That’s because a credit score is meant to estimate the likelihood you’ll pay your debts, while the credit-based insurance score looks at how likely it is you’ll file an insurance claim.

Because more than one company can issue a credit-based insurance score, your rating may differ from company to company. While the exact criteria used by each scoring model varies, here are the most common factors that affect your credit scores.

  • Payment History: 35%
  • Amounts Owed: 30%
  • Length of Credit History: 15%
  • New Credit: 10%
  • Credit Mix: 10%

What Could Negatively Impact Your Insurance Credit Score?
Based on the categories above, the following could negatively impact your insurance credit score:

  • Missing payments.
  • Having little to no credit history.
  • Too many hard credit inquiries. (A hard credit pull occurs when you apply for an auto, student, or personal loan, mortgage, or credit card.)
  • High credit card balances as compared with your credit limit, known as your credit utilization.

Unlike the insurance companies themselves, your personal information such as race, age, or gender, cannot be used to determine your credit-based insurance score.

Average Insurance Rates for Poor Credit
Although insurers differ on what is a “poor” insurance credit score, 625 and lower would be considered poor credit on average. To give an example of the difference in rates, take a look at this auto insurance example.

Average car insurance rates for a driver with poor credit are:

  • $2,506 per year for full coverage.
  • $1,078 per year for minimum coverage.

Comparatively, the average car insurance rates for a good driver with good credit are $1,080 less per year for full coverage and $471 less per year for minimum coverage.

Keeping An Eye On Your Credit-Based Insurance Scores
Just because you now have another set of scores to keep on your radar doesn’t necessarily mean you need to make a drastic change in your financial monitoring. Your already existing credit management practices for your regular credit report are what you need to do to maintain great insurance scores all around. This means the advice regarding score improvement is applicable for both credit scores.

If you can avoid negative credit practices and excessive credit card debt, you’re well on your way to earning great scores in both reports. If you can also avoid filing both auto and homeowner claims, that could also help to ensure your insurance premiums are as competitive as possible.

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