What You Should Know About Credit-Based Insurance Scores
Find out why insurers base rates on your credit score - and the U.S. states where that's not allowed.
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If you’re a regular Money Girl reader or podcast listener, you already know that credit is an important part of your financial life. It affects what you have to pay for interest on a car loan, mortgage, or credit card.
But many people don’t realize that even if you don’t have credit accounts, your credit still determines how much you have to pay for certain types of insurance.
In this episode I’ll tell you what a credit-based insurance score is, why it’s used, how to raise it, and the U.S. states where using your credit to set rates is prohibited.
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What Is a Credit-Based Insurance Score?
A credit-based insurance score is a rating used by most insurance companies to help predict your risk for property policies, such as auto and home coverage.
Studies by federal and state regulators, universities, insurance companies, and independent auditors have shown that consumers with good credit file fewer insurance claims, and therefore are less risky customers.
In order for an insurance company to be profitable, it has to take in more money in premiums than it pays out in claims. So, they’re interested in how often you’re likely to file claims and how expensive those claims will be.
The idea is that the way you handle your finances says a lot about how responsible you are in other areas of your life, like driving a car or maintaining your home. So, instead of raising rates across the board, insurance companies reward those with good credit by charging them less.
Insurance scores aim to predict your likelihood of having an insurance loss while credit scores aim to predict how likely you are to repay a debt.
Insurance Scores Are Different from Credit Scores
It’s important to understand that an insurance score is different from a regular credit score that’s typically used by a lender or credit card company.
Both types of scores use information in your credit report; however, they’re trying to forecast different things. Insurance scores aim to predict your likelihood of having an insurance loss while credit scores aim to predict how likely you are to repay a debt.
When you apply for insurance, the carrier purchases your credit history from one or more of the 3 nationwide credit agencies (Equifax, Experian, and TransUnion). Your information is added to the insurer’s proprietary scoring model or to one created by another company, like TransUnion’s Insurance Risk Score, and generates a score.
See also: 7 Essential Rules to Build Credit Fast
Your credit-based insurance score is never calculated using information such as your age, gender, race, religion, marital status, employment, or any other information that’s not found in your credit report.