Everything you need to know about credit-based insurance

What is a credit-based insurance score?

A credit-based insurance score is a way for insurance companies to determine how likely you are to file an insurance claim after an accident.

Insurance scoring companies calculate scores in a way that's similar to how a credit company calculates a score: companies look at a driver's payment history, credit history length, outstanding debt, hits for new credit and credit mix. They'll then get a number between 200 and 997, which the insurance companies have grouped into tiers.

Insurance score reporting companies can also produce identical scores for auto insurance, homeowners insurance or renters insurance. However, more widely used scoring companies like LexisNexis will generate a separate score for each type of insurance^[1]. 

How does a credit-based insurance score differ from a credit score?

Credit scores and insurance scores are similar because they use the same factors to determine the person’s score. Both companies look at the following to give a driver their customers their scores:

• Payment history

• Credit history length

• Credit mix

• Outstanding debt

• Pursuit of new credit

However, the companies who generate the scores rate each factor differently because each score serves a different purpose: a credit score shows how likely you are to repay debt. In contrast, a credit-based insurance score determines how likely you are to file a claim. 

Similar to a credit score, certain factors are off-limits when rating a credit-based insurance score. Factors that are out of bounds include:

• Race

• Gender 

• Marital status

• Age

• Religion

• Location of residence

• Occupation and income

Because companies use the same factors, factors that negatively impact your credit score can do the same for your credit-based insurance score. This includes:

• Having little to no credit history

• Missing payments

• Carrying high balances on credit cards compared to credit limits

• Having too many hard credit inquiries

What is considered a “good” and “bad” score?

Credit-based insurance scores range from 200 to 997. Like credit scores, insurance scores are grouped into tiers; however, those tiers don’t align with “good credit” or “bad credit”.

Insurance companies then rate their customers based on the tier that each driver’s score falls within. The way each insurance company groups and rates the tiers differs from company to company. Generally speaking, however, the tiers look something like this:

• High: 997-776

• Average: 775-626

• Below average: 625-501

• Low: Under 500

Insurance scoring is only available in some states. Companies can’t base their choice to cancel coverage or increase rates solely on a driver’s score. Furthermore, states like California, Massachusetts, Hawaii and Michigan have outlawed using any credit-based score to determine insurance rates.

Wrapping up

The insurance industry focuses on the insurance risk that each customer poses. They use insurance scoring models, of which credit is often a factor, to determine the cost of your insurance policy.

While the use of credit-based insurance is controversial and is against the state law of a handful of states, it is currently a major factor that affects the insurance quotes of millions of Americans.

For policyholders who live in states where insurance credit scores are allowed, staying on top of credit along with other rating factors will improve the insurance quotes you’re offered.