Providing insurance throughout Arizona

How Does My Credit Score Influence My Insurance Score?

Insurers look at a variety of criteria to arrive at your insurance score, which determines your premium and even your insurability. One of these criteria is your credit score, which research shows is a good predictor of whether you will experience a loss. It’s important to note that, though your credit score plays a role in the underwriting process, it is not the only determinant of your overall credit-based insurance score.

What Is a Credit-Based Insurance Score?

Text on sign, what's your score in San Tan AZBeginning in the 1990s, insurance companies began using credit scores to predict the likelihood an insurance customer would experience a property loss. Unlike the creditors who typically refer to credit scores, insurance companies are concerned less with credit-worthiness and more in determining the risk inherent in providing an insurance policy.

Insurers expend a great deal of effort determining risk. At its most basic level, insurance is a bet. You, the insured, are betting the insurer that something bad will happen to you, such as a car accident or a break-in. The insurer takes the other side of that bet, betting that something bad will not happen to you. Your credit-based insurance score helps determine whether to place that bet and at what odds (the amount of your premium).

Why Do Insurance Companies Use Your Credit Score?

Insurers look at many items when determining risk, including age, gender, where you live and how long you’ve lived there, claims history, what you do for a living, and, yes, your credit score. They consider each item because it has been proven to have some correlation to the likelihood that you will file a claim.

According to the data, higher credit scores translate into fewer insurance claims, meaning that customers with high credit scores pose a lower risk and likely lower losses. The keyword is “likely,” as not all people with high credit scores present low insurance risk and vice versa.

Consider the auto insurance premium increase you experience after adding a newly licensed driver to your policy. This is not because all new drivers have accidents. Rather, it is because, statistically, they are more likely to have accidents. This is due to a number of factors, but mainly the simple fact that younger drivers have less experience behind the wheel than long-term drivers have. This makes them a higher risk for insurers and therefore more expensive to insure. Insurers note that charging statistically high-risk customers higher premiums helps lower insurance rates for low-risk customers.

What is a Regular Credit Score?

Sometimes called a FICO score, your credit score is more than a record of whether you pay your bills on time. Like your insurance score, your credit score considers a variety of factors, including the type of debt you carry, your debt-to-income ratio, as well as how much of your debt is “maxed out.” For example, keeping your credit card balance below 20 percent of your credit line adds points to your FICO score.

Your FICO score ranges between 300 and 850, with the higher number indicating greater credit-worthiness. A perfect score of 850, aside from being rare, does not indicate a person with zero debts. Often, a person with no debt has a lower FICO score than a person with a few dings to their credit.

How Is My Insurance Score Calculated?

Your insurance score predicts the likelihood you will experience a claim, such as a car accident or theft. Your insurer compiles information from other policyholders with similar credit scores, looking at those clients’ claims histories to help determine your insurance score.

This differs from the way financial institutions, such as banks, consider your credit score. These entities look at items such as your job history, income, and debt to determine your credit-worthiness and may deny you credit based on these factors. Insurers do not look at these items when determining your insurance score, and they do not use them to deny you an insurance policy. The primary goal of an insurance score is to determine your premium.

Insurers review a variety of factors from your credit report, weighting each one to arrive at a final score. These factors include:

  • Payment history: The amount and regularity of late payments, as well as the number of elapsed days between the due date and your payment
  • Public records: Including collections, bankruptcies, liens, and foreclosures
  • Credit history: The length of time you have been in the credit system
  • Credit inquiries: The number of times you have recently applied for new credit, such as credit cards, mortgages, car loans, and utility accounts
  • Number of open credit lines: Relates to the number of “open” credit cards you have and whether you use them
  • Installment accounts: The number of installment accounts you have opened in the past 24 months
  • Types of credit being used: This can relate to finance company loans, store credit cards, and major credit cards
  • Amount of unused credit: The sum of money you owe versus your available credit, i.e. owing $350 on a credit card with a $500 limit leaves you with $150 unused credit, or 30 percent of your available credit

Some factors on your credit report, of course, have a positive effect on your insurance score. These include:

  • A long-established credit history
  • Low use of available credit (i.e. maintaining a low balance on credit cards)
  • Multiple open accounts in good standing
  • No late payments or past-due accounts

What Will Happen if I Receive a Low Insurance Score?

If you receive a low insurance score, you may face what is known as an adverse action. There are multiple possible adverse actions possible due to a low insurance score. These include:

  • Denial of coverage
  • Termination of your coverage
  • An agent who represents an insurer may fail to apply for coverage with that insurer after your request
  • Placement in an “assigned risk” plan in the non-standard market or with a surplus lines carrier
  • Charging a higher rate or placement in a higher rating tier

How Can I Fix My Insurance Score?

Arizona law requires an insurer to inform you if it takes an adverse action based on your credit history. The insurer must also inform you what exactly was found and from where it received the credit report. If you have a low credit or insurance score, you can take steps to improve it.

Start by requesting a free credit report. Every citizen is entitled to one free credit report each year from each of the three major credit bureaus (Equifax, Experian, and TransUnion). This gives you the opportunity to review your report for errors and correct any mistakes you find. The link above walks you through the entire process, but essentially, you need to contact the credit bureau reporting the false information. The bureau then investigates your claim and may request documentation supporting your cliam. You should also ask the bureau to send a notice of correction to any insurer or creditor that has checked your credit history within the past six months. Please note that each bureau operates independently, so you must contact all three to correct errors.

Also, contact your insurer directly about mistakes you find, let them know what information you are disputing, and ask if these corrections will make a difference in your insurance score.

Of course, you can only have errors removed from your credit report. Factual information, even if detrimental to your credit score, cannot be disputed. You can, however, begin repairing any damage.

  • Make payments on time, every time. This may require automatic payment plans, setting calendar reminders, or similar steps to keep your finances on track.
  • If you have little to no credit, begin building a credit history. The easiest way to do this is by obtaining a credit card and making regular purchases. When you make your monthly payments, however, leave a small amount unpaid, between 15 and 20 percent of your available credit line, as this has a greater impact on your credit score.
  • If you have multiple credit accounts and each is “maxed out,” begin paying them down. Even if you make regular monthly payments, using all of your available credit counts against you. Your goal is to carry a balance of around 15 to 20 percent of your available credit. So, if you have a $500 limit on your card, do not carry a balance of more than $100.

It may take time, but you can improve your credit score, and therefore your insurance score.

What Are My Rights? Frequently Asked Insurance Score Questions

Do you need my permission to look at my credit report?

Not according to the Fair Credit Reporting Act, which determined that insurers had a “permissible purpose” to review your credit report. However, even though the FCRA grants insurers the right to review your credit information without your permission, they do need to inform you that they will collect your credit information, as well as inform you of your right to access this personal information and request changes if it is inaccurate.

How do you use my insurance score?

Insurers use your insurance score for rating and underwriting. Rating determines how much you will be charged for your premium. Underwriting determines whether to give you a new policy or renew an existing policy. If you have had an auto or homeowner policy for 60 days, an insurer cannot cancel or refuse to renew your policy based on your credit or insurance score.

Are there any credit score factors that insurers are not allowed to use?

Yes. Arizona law does not allow insurers to consider certain parts of your credit history when determining your premium. These include:

  • A lien satisfaction or bankruptcy more than 7 years old
  • Your total line of available credit (though they can consider the ratio of what you owe on your available credit)
  • Credit scores derived from income, gender, nationality, religion, marital status, ethnic group, address, or zip code
  • Collection accounts with a medical industry code
  • The absence of your credit history or the insurer’s inability to determine your credit history

Is my agent or insurer required to tell me my insurance score?

No. Your insurer or agent may not even know what your insurance score is. All the vendor has to tell the insurer or agent is that you qualified for X rate. What’s more, knowing your insurance score would only give you a snapshot of your credit, and wouldn’t be especially useful, since insurance scores often vary drastically from one insurer to the next, as each insurer uses its own scoring model.

Will I still be able to purchase insurance if I have no credit history?

Yes. Arizona law forbids insurers from taking adverse action based on a lack of credit history or inability to determine your credit score. The exceptions are if it is actuarially justified or if the insurer treats you as having neutral credit information.

To learn more about how your insurance score and credit history affect your rate, contact an independent insurance broker today.