Your Insurance Company May Be Using a Credit-Based Insurance Score — Even If Your Loan Score Looks Fine

As a borrower, maintaining a good credit score is important. But it's not the only important factor.

Insurers in many states also use separate credit-based insurance scores, which can help companies determine how likely you are to file a claim. Here’s what you need to know.

What is a credit-based insurance score?

A credit-based insurance is used to predict the likelihood of an insurance loss or claim, not necessarily how likely you are to repay a loan. They include variables like a consumer’s driving record, claims history, location, property details, coverage limits and deductibles, according to the National Association of Insurance Commissioners (NAIC).

Your credit history still plays a role. A strong payment history, low outstanding debt, long credit history and healthy credit mix can all help you build your credit score. A strong credit score can result in lower premiums.

How it can affect what you pay for car or home insurance

Each state has different rules, but it is common for insurers to use credit-based insurance scores when determining premiums. That can translate into two people with similar homes or cars receiving different premiums because of credit-related data.

You can’t control every variable, such as your location or past claims history. However, boosting your FICO score can give you an edge when insurers prepare their quotes. Correcting any errors on your credit report can lead to quick, small wins.

There is debate about whether credit-based insurance scores are the right approach. Insurers argue that these scores help them price risk, while consumers and consumer advocates suggest that the vagueness of these scoring systems can result in unfair premiums.

What consumers can do before renewal or when shopping

Your credit score is a good place to focus when it comes to keeping insurance premiums reasonable. You can focus on strengthening your credit score, and requesting a free copy of your report at AnnualCreditReport.com and dispute any errors.

You can also compare insurers instead of sticking with the company you normally use, as you may find a lower premium. Consumers can also reach out to their state insurance department to learn if their state allows insurers to use credit-based insurance scoring when determining premiums.

The Federal Trade Commission (FTC) offers some protection. It requires insurance companies to notify consumers if an adverse action, such as a higher premium or a rejected policy application, took place because of information in a consumer report. It also gives consumers the right to dispute any of the information that the credit reporting agency provided, which can potentially result in a lower premium or a policy that gets approved.