Credit-Based Insurance Scores: How They Change Your Premium

Sarah Mitchell

Sarah Mitchell writes about insurance basics and consumer comparisons. Insurance enthusiast 12 years. Texas-based.

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Quick answer: A credit-based insurance score uses parts of your credit report, like payment history and debt levels, to predict claim risk. In most states it can raise or lower your auto and home premium, but it is only one factor, and a few states such as California, Hawaii, and Massachusetts ban or limit it for auto insurance.↗ Share on X

Insurance underwriters use a credit-based insurance score to predict how likely you are to file claims, and in most US states that score can raise or lower your auto and home insurance premium. It is not the same as your regular credit score. It looks at parts of your credit report, such as payment history, how much debt you carry, and how long you have had credit, but it ignores your income, race, religion, and where you were born. A better insurance score can mean a lower price. A weaker one can mean a higher price, though it is only one of many factors.

Below is a plain explanation of how the score works, what moves it, where it is not allowed, and what you can do this month to improve your position.

What is a credit-based insurance score?

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A credit-based insurance score is a number built from information in your credit report. Insurance companies use it to sort people into price groups. The idea behind it is that certain credit habits tend to line up with how often people file claims. Insurers say the score helps them price risk. Critics say it can punish people for money problems that have nothing to do with how they drive or care for a home. Both views are part of the public debate.

Some key facts:

• It is used mainly for auto and homeowners insurance. It is generally not used for health insurance.
• Companies such as LexisNexis, TransUnion, and FICO build insurance scoring models. Each insurer chooses which model to use and how much weight to give it.
• The number range is different from a regular credit score. Each model has its own scale, so you usually cannot compare one company's number to another's.
• Checking it does not hurt your regular credit score. Insurers use a "soft" check, which does not count against you when you apply for loans.

How is it different from a regular credit score?

Both scores come from the same credit report, so the habits that help one usually help the other.

What parts of your credit report matter most?

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Each scoring model is different, and the exact formulas are not public. But insurers and scoring companies have described the general factors. Usually these weigh the most:

1. Payment history. Late payments, accounts in collections, and bankruptcies tend to hurt.

2. Outstanding debt. Using a large share of your available credit card limits tends to hurt.

3. Length of credit history. A longer history of on-time accounts tends to help.

4. New credit applications. Opening many new accounts in a short time can hurt.

5. Mix of credit. Having a combination of account types, such as a card and a loan, may play a smaller role.

Things insurance scores are not supposed to use include your income, race, color, religion, national origin, gender, marital status, age, address, and whether you have received public assistance.

How do underwriters actually use the score?

Underwriting is the process insurers use to decide whether to sell you a policy and at what price. The insurance score is one input among many. A typical auto policy price also depends on:

• Your driving record and past claims
• The car you drive and how many miles you drive
• Where the car is kept overnight
• Your deductible (the amount you pay before insurance pays)
• Coverage limits and add-ons
• Discounts such as bundling home and auto

For a home policy, the age of the roof, the building materials, the distance to a fire station, and past claims on the property also count.

Here is a simple way to picture how the score fits in. The insurer usually starts with a base price for your area and coverage, then applies a set of adjustments. Your insurance score may place you in a better or worse tier, which moves the price up or down. A clean driving record and a strong insurance score together tend to give the best pricing. A strong score cannot fully offset a record full of accidents, and a weaker score does not mean you cannot buy coverage.

The size of the effect varies widely by insurer and by state. Some companies weigh it heavily. Others give it little weight. That is a big reason why shopping around can lead to very different quotes for the same coverage.

Where are insurance scores limited or banned?

Insurance is regulated state by state, so the rules depend on where you live. A few states, including California, Hawaii, and Massachusetts, ban or sharply limit the use of credit in auto insurance pricing. Some other states limit how much credit can affect your price or set special rules, for example after a major life event. Rules can change, so check with your state's department of insurance for the current law where you live.

Many states follow a model law that gives consumers certain protections, such as:

• An insurer cannot use credit as the only reason to deny, cancel, or refuse to renew a policy.
• An insurer may need to re-check your score when you ask, often once a year at renewal.
• Insurers may need to make exceptions if your credit was hurt by an "extraordinary life circumstance," such as a serious illness, death in the family, divorce, job loss, or identity theft.

What happens if your score hurts your premium?

Under the federal Fair Credit Reporting Act (FCRA), if an insurer charges you more because of information in your credit report, it generally must send you an "adverse action notice." This notice should tell you:

• That credit information affected the decision
• Which company supplied the report or score
• That you can get a free copy of your report from that company
• That you can dispute wrong information

Keep this letter. It tells you exactly where to look.

How can you check and improve your position?

You cannot change your insurance score overnight, but these steps can help over time.

Step 1: Get your credit reports

Go to AnnualCreditReport.com, the official site for free reports from Equifax, Experian, and TransUnion. Download all three. You can also ask LexisNexis for your consumer disclosure report, which can include insurance-related information and your claims history.

Step 2: Look for errors

Check every account carefully:

• Accounts that are not yours
• Late payments you know were on time
• Debts listed twice
• Old negative items that should have aged off (most negative items drop off after seven years)

Step 3: Dispute mistakes in writing

File a dispute with the credit bureau that shows the error. Include copies (never originals) of proof, like bank statements. The bureau generally must look into it, usually within 30 days.

Step 4: Lower your card balances

Paying down credit card balances is one of the faster ways to improve credit factors. Many people aim to keep balances under 30% of each card's limit, and lower is better.

Step 5: Pay every bill on time

Set up automatic minimum payments so nothing slips. One missed payment can stay on your report for years.

Step 6: Avoid opening several new accounts at once

Apply for new credit only when you need it, especially in the months before your policy renews.

Step 7: Ask for a re-rate and shop around

Once your credit improves, call your insurer before renewal and ask whether they will re-check your insurance score. Then get at least three quotes from other companies. Because each insurer weighs credit differently, a company that weighs it lightly may offer you a lower price today.

When should you get professional help?

Talk to a licensed insurance agent or broker if you are confused about why your price went up or which company weighs credit less. If your credit problems come from debt you cannot manage, a nonprofit credit counselor can help you build a plan. If you think an insurer broke your state's rules, contact your state's department of insurance and file a complaint. This article is general information, not legal, financial, or insurance advice for your situation.

Your next step

This week, download your three free credit reports from AnnualCreditReport.com and spend 30 minutes checking them for errors. If you find one, file a dispute the same day. Then put a reminder on your calendar 45 days before your auto or home policy renews, so you can ask your insurer to re-check your score and collect at least three competing quotes.

FAQ

Is a credit-based insurance score the same as my credit score?

No. Both come from your credit report, but the insurance score predicts the chance of a claim, while a regular credit score predicts the chance of late loan payments.

Does an insurance quote hurt my credit score?

No. Insurers use a soft check, which does not affect your regular credit score.

What can I do if my credit raised my insurance price?

Read the adverse action notice, get your free credit reports, dispute any errors, improve your credit habits, then ask your insurer to re-check your score and compare quotes from other companies.

Educational content, not personalized financial advice. Sources cited where applicable.