This is a guest post by Parker Bonnell of Honest Policy. As we mention in the outro insurance credit scores is something we’ve been meaning to tackle for some time so it’s always great when we can get somebody who is an expert to help with content specific to that niche.
Contents
Introduction
One thing that many people don’t know is the affect your credit can have on your insurance. In most states, your credit score can play a larger role in the price of insurance than many other factors do. If you didn’t know that, you’re not alone. About two-thirds of Americans are similarly unaware, according to a study conducted in 2005 by the Government Accountability Office. On the flip side, having or paying for insurance does not have much effect on your credit score, with the exception of not paying your bill on time (total payment history accounts for 35% of your FICO score).
Will an insurance quote affect your credit report?
No. The credit check that occurs when you apply for insurance is not like when you apply for a new credit card either. While they will show up on your personal credit report, they are not provided to lenders, so will not be considered when calculating credit scores. This is confirmed by Experian here.
In most States your credit report/score can be used by insurers to determine the premiums you should pay (the exception being health insurance where this is prohibited at a Federal level). If your credit information is having a negative effect on your insurance price then under the Fair Credit Reporting Act insurers are required to you a notice of adverse action. Generally a notice of adverse action is required if any of the following happen as a result of your credit:
- Insurance is denied
- Rates are increased
- Policy is terminated
If you’ve ever been denied for a credit card then you should be familiar with these notices of adverse action. Unfortunately unlike card issuers these notifications can be hard to spot. One can see rough estimates of credit’s effects on prices for multiple insurers in each state by using the credit tool over at Honest Policy.
What States are exempt?
Some States do not allow insurers to use credit information to determine your insurance premiums. These restrictions vary based on the type of insurance and are outlined below.
Auto
Credit affects your insurance premium unless you live in California, Massachusetts (according to this comment it can still be somewhat used), or Hawaii. If you are in one of the other 47 states, the cost of insurance for someone with poor credit can be more than twice that of someone with great credit.
Home
Here the only exceptions are Maryland and Hawaii. In other states, the insurance price difference between low and high credits can be even more significant than for auto.
Life
With life insurance, your credit score typically has little effect on the price of your premium, unless you’re going through bankruptcy (or have gone through it recently). The reason bankruptcy proceedings may be lead to a denied application or higher prices is because of the insurers worry that you won’t be able to pay your premiums.
Health
Credit has zero effect on your health insurance prices. Due to the ACA, the only things that affect the price of this is your location, age, and whether you smoke.
Renters
According to the comments it should just follow the same exceptions as home insurance.
Credit score exception
In some states including Delaware, Iowa, Rhode Island, Connecticut and Nevada, you can apply to your insurer for a credit score exception if your score has suffered as the result of an “extraordinary” life event. If approved, your insurer will provide a policy quote that doesn’t take into account your poor credit (which should be far more affordable). Such events generally include the following:
- Catastrophic events, as declared by the Federal or State Government
- Serious illness or injury of yourself or an immediate family member
- The death of a spouse, child or parent
- Divorce or involuntary interruption of legally-owed alimony or support payments
- Identity theft
- Temporary loss of employment for 3 months or more if resulting from involuntary termination
- Military deployment overseas
- Other events, as determined by the insurer
Other states where exemption requests are reportedly available are Colorado, Florida, Louisiana, Montana, New Mexico, Texas, and Virginia. It is plausible that other states have since enacted similar provisions however. The easiest way to check would be to contact your insurer and ask about the possibility. If you find out your state has them, let us know in the comments, and we can update accordingly.
Why do insurers use credit for insurance prices?
It might seem odd that an insurer would use your credit score for determining the price of the policy premium. With auto insurance for example, why assume that someone who has a low credit score is therefore a riskier driver who warrants higher prices? Well, according to a few studies there is greater likelihood that someone will make an insurance claim if they have poor credit. At least one of these studies found that the use of credit scores for pricing had a disproportionate impact on certain minorities (primarily Latinos) and low-income individuals.
Insurance Credit Scores
A popular misconception is that insurers simply use a standard credit score (such as FICO or VantageScore). But they actually use industry specific scores called insurance credit scores. Reports indicate that they focus on certain key factors that are similar to how traditional credit scores are calculated but with different weightings. Credit Karma offers a tool that provides at least one estimate of your insurance score (via Transunion called auto insurance score) if you’re looking for an idea of where you stand. Keep in mind though that there is a difference between “educational” scores such as these, and your “true” scores.
For auto insurance there are three major insurance credit score systems (unless the insurer is using their own in-house formula):
- FICO Auto Score 9 XT
- LexisNexis Attract™ Auto Insurance Score
- CreditVision Auto Score
The FICO 9 XT Score for example looks particularly carefully at the past 30 months of an applicant’s history. It also ignores accounts from collection agencies that have been paid off (as does the CreditVision Score), and differentiates between unpaid medical and non-medical bills that have gone into collections. This means that if you’ve been working on improving your score lately, and have paid off your debts, it will have a more significant impact than it would for a traditional credit score.
Insurance Score Ranges
As mentioned, the insurer may have their own scoring system where the range isn’t available to consumers. If they’re using one of the three systems mentioned above though, the ranges are as follows:
- FICO | 250-900
- LexisNexis | 500-997
- CreditVision | 300-850
What is a good insurance score?
Experian reports that the categories for FICO are:
- Excellent is 800+
- Very Good is 740-799
- Good is 670-739
- Fair is 580-699
- Poor is 579 or less.
According to LexisNexis their scores are as follows:
- Good is 776-997
- Average is 626-775
- Below Avg. is 501-625
- Poor is less than 500.
TransUnion doesn’t provide a guide, but their CreditVision score uses the same numbering system as a traditional credit score, where presumably the same categories apply:
- Excellent is 750+
- Good is 700-749
- Fair is 650-699
- Poor is 550-649
- Bad is less than 550.
Final Thoughts
Thanks to Parker for putting together this post, it’s been something I’ve been meaning to write about for a long time but I’ve never found the time or known enough about it to do it justice. I think this is a great jumping off point and I’m confident as readers share their own knowledge and data points we can make this post a useful resource page.
If you found this post helpful then check out Honest Policy, they provide tools and data to help pair consumers with the right insurance carrier for them. The best carrier for a single guy with poor credit but a nice car is not the same as someone with a family of 4 who is a homeowner but has a DUI. Our goal is to inform the consumer how to get the most value from the 2-3 carriers that are the best potential match for them. They also have a blog you can check out here.
Credit Karma appears to no longer surface the TU auto credit based insurance score.
(caveat: I am in California; Someone based in another state should confirm. It reportedly used to surface under Loans > Auto > Insurance)
I got quoted a lower rate at progressive as a new customer than for my renewal of my existing policy, for the same coverage. So I called and had them honor their quote for me as a new customer.
Every time I get a quote online the screen populates with DL date from 6 years ago expired DL from another state, and an insurance company I have never heard of. I get a letter in the mail that my quote is higher because of my negative history from LexisNexis, who clearly is using 6 year old data from another state I haven’t even visited in years and who it appears an identity thief might be using my DL to get third rate cheap auto insurance from. There are phone numbers in my personal data from an area code I have never heard of either. But no new credit accounts to dispute, so I dispute the phone numbers but that is not exactly the sort of identity theft that changes a credit score. And LexisNexis only sends me access codes for their report by snail mail, and none of those codes actually work, so far.
So yo know it is a racket, and a bunch of nonsense.
Just some datapoints for people that come back to this stuff like I do.
H06 policy up for renewal. %25 increase YOY. Agent said it’s because the company started using LexisNexis and I have a negative action letter in the mail.
10 new credit cards, 12 checking accounts, and 5-6 high usage (90%+ of credit limit) 0% offers over the last year.
The ~$4,000 from those hits is worth a $200 increase. Thank you DoC.
Can one pay “AIG Term Life Insurance” premium (annual) using Credit Card?
Thank you in advance for your kind inputs DoC & all the fellow DoC followers 🙂
No. Only the initial premium.
Forgot to add— my auto policy with same insurer, set to renewal early next year will also be subject to rate increase based on Lexis Nexis insurance score, and underwriter tells me that all insurance companies use the insurance score to set your rates, therefore even if I switch insurers I will still get stuck with insurance score premium increase. Outrageous!
Of course they will tell you that, to keep charging the higher premiums! And they lie. Not all insurance companies do, and even those that do will likely discount it to get you to switch. So, go ahead and be as outrageous as they are, and get a better rate!
Oh, and one other thing – I discovered that the credit rating was only taken from the ‘primary driver’ … so if you share the driving equally with someone else in your household, try requoting with different primary drivers. (I forget which insurance co. I’ve had this experience with, it was either Progressive, Geico or National General)
My home insurance renewal premium increased more than $200, and according to underwriter more than half of the increase was a result of a 650/997 max insurance score from Lexis Nexis.
The low score was based on:
–my opening 2 new credit card accounts in last six mos;
–avg age of all my accounts (7 yrs vs 9 yrs LexisNexis standard);
–having no mortgage loan history;
–and the overall time all my accounts have been opened in months (3400 mos vs 990 mos LexisNexis standard).
Called LexisNexis rep who told me my score was based on credit report from Experian. I then got my copy of report (my Experian FICO score is 804/850 max), and got my TransUnion insurance score from Credit Karma (916/997max).
Called LexisNexis again, rep could not explain big discrepancy between their score and Transunion score and did not know how they calculated my score, said I have to speak to manager for details/explanation but manager is never available. Called and spoke to different reps with same result, feels like they are intentionally giving me the runaround.
I am thinking of filing a complaint but do not know who has jurisdiction? CFPB or State Insurance Dept. Anyone have experience challenging this unfair practice, it seems to be a scam to jack up insurance premiums without basis using ridiculous and non transparent standards, this should be challenged in a class action lawsuit?
Hi Travis,
Start to google auto/home insurance comparisons online and make phone calls for more rate quotes. You will be surprised on the price differences between insurance companies.
Also remember that insurance companies usually raise rates on their existing customers to offset the lower rates they offer new customers.
Let us know if you find lower rates with other insurance companies.
Good luck!!!!!!!
My homeowners and auto insurance are currently up for renewal (both are with the same company). The following is taken directly from the renewal notice:
Your rate was determined in part by your insurance score. Had your score been higher, you may
have qualified for a lower rate. The following characteristics influence your score:
Presence of an Account Reported as 30 Days Past Due – Industry research shows that consumers with a delinquent payment history on their accounts experience more insurance losses. Our score considers if any accounts on your credit report have been reported as 30 days past due. To improve this aspect of your score, avoid letting accounts get to a delinquent status and pay your delinquent accounts as soon as possible to avoid accounts becoming more seriously delinquent. In order to achieve the best rating, there must be zero accounts reported as 30 days past due on your credit report.
Number of Accounts Reported Within 6 Months – Industry research shows that consumers with a large
number of reported accounts have more insurance losses. Our score considers the number of accounts reported by your creditors within the last 6 months. To improve this aspect of your score, open new accounts only when needed.
Age of Newest Account – Industry research shows that consumers with recently opened accounts
experience more insurance losses. Our score considers how long it has been since you opened your last account. To improve this aspect of your score, consider keeping your oldest accounts active and only open new accounts when needed. In order to achieve the best rating, the age of your most recently opened account must be at least 3 years old.
Number of Inquiries Within 24 Months – Industry research shows that consumers who are looking to
obtain new credit accounts have more insurance losses. While not all applications or inquiries initiated
by you will result in an account opening, it is an indication of a possible increase in credit obligation.
Our score considers the number of inquiries initiated by you to obtain credit within the past 24 months.
To improve this aspect of your score, apply for credit only when needed. In order to achieve the best
rating, there must be no more than 1 credit inquiry within the past 24 months on your credit report.
Age of newest account must be at least 3 years old and no more than 1 inquiry in last 24 months — this is ridiculous!
i read somewhere before that credit affects your car insurance premium but i did not know that living in CA that didn’t matter. i was actually gonna ask Allstate to re-evaluate my policy around the turn of the year and was gonna point out my exceptional credit score. O.o oops!
When my insurance agent told me about this many years ago, I was confused about the link between insurance rates and credit scores. I figured my car insurance ought to be determined on the type of car and driving record, but he explained that the insurance companies had found that people with poor credit simply made more claims.
After thinking about it a bit, it made a lot of sense. If you’re completely broke and can’t make your car payment (and maybe upside down on the loan), it would be easier to “sell it to the insurance company” by letting the car get stolen or driving it into a tree than risk a repo.
I think the states that prohibit using credit scores for insurance rates help those with bad credit (undeservedly) and stick it to the people with good credit.
I’ve worked hard for good credit – why should I have to pay the same rate as someone who’s never paid a bill on time in their life?
Good point but Its not even *just* that; credit score is very strongly correlated with conscientiousness.