What Does Credit Have To Do With It? | Credit Based Insurance Scores

We have all been there. At the bank, buying a car and yes, getting insurance, we are asked if it’s okay to run a credit check. Seems it needs to be ran for just about everything these days. Does it make a difference? If so, what is that difference? While we can’t comment on other areas of uses of credit scores, we can help with understanding what, how, and why it is used for insurance.

First, let’s take a look at the credit scores insurance companies use and how it differs. Credit scores are determined based on information from your credit report and are used by lending institutions to determine how likely it is that you’ll repay a loan on time. Credit scores determine interest rates and loan qualifications. Credit-based insurance scores were introduced in the early 1990s and use certain elements of a person’s credit history to predict how likely consumer is to have an insurance loss. According to the National Association of Insurance Commisioners, Credit-based insurance scores do not use details such as:

  • Race, color, national origin
  • Religion
  • Gender
  • Marital status
  • Age
  • Income, occupation or employment history
  • Location of residence
  • Any interest rate being charged
  • Child/family support obligations or rental agreements
  • Certain types of inquiries of your credit report like account review inquiries, employment inquiries, promotional inquiries from credit companies, etc.
  • Whether or not a consumer is participating in credit counseling of any kind
  • Any information not found in the credit report

How does it work? To help establish insurance rates most U.S. insurance companies use credit-based insurance scores, along with your driving history, claims history and many other factors. If you have a high credit-based insurance score, an excellent driving history, and zero claims on your record, you’ll typically qualify for lower rates. Of course, your score is only one of many factors used to calculate your premium. If you have an excellent insurance score but a less-than-stellar driving history, for example, you might be considered riskier to insure. So, an insurance score isn’t always everything.

You might ask, what influences my insurance score and does it affect my credit? When it comes to questions on whether or not an insurance inquiry would affect credit scores, It may be best to look to Experian as an expert on this. A customer wrote:

                                        Dear Experian,

I am shopping for car insurance. All of the insurance companies want to check my credit report. What impact will this have on my credit report?


Dear JNI,

An inquiry will be added to your credit report each time an insurance company accesses your credit report. But, the inquiries will have no effect on credit scores or lending decisions.

Insurance inquiries are shown only on your personal credit report. They are not provided to lenders, so they are not considered in credit score calculations or lending decisions. The inquiries are treated the same way as inquiries for employment purposes, pre-approved credit offers, and requests from you for a personal credit report.

Because inquiries for these purposes are the result of your application for credit, they are shown only to you so that you have a complete record of who accessed your credit report and why.

Thanks for asking.

Many insurance companies use LexisNexis® to obtain your credit-based insurance score. LexisNexis looks at the information on your credit history from credit bureaus like Experian to compute your insurance score, meaning that your credit score will impact your credit-based insurance score. What type of credit information is associated with an favorable score?

  • Absence of collections
  • No late payments
  • Low credit balances relative to limits available

As found on NAIC, FICO looks at five general areas it believes will best determine how you manage risk. This is the breakdown of what it considers and how much the information generally weighs in figuring your credit-based insurance score:

  • Payment History (40%) — How well you have made payments on your outstanding debt in the past
  • Outstanding Debt (30%) — How much debt you currently have
  • Credit History Length (15%) — How long you have had a line of credit
  • Pursuit of New Credit (10%) — If you have applied for new lines of credit recently
  • Credit Mix (5%) — The types of credit you have (credit card, mortgage, auto loans, etc.)

You can obtain your credit-based insurance score report through LexisNexis and dispute any unwarranted entries. Insurance companies aren’t permitted to make any adjustments to your score.

The Fair Credit Reporting Act (FCRA) gives you the right to obtain your credit report once every 12 months, for free. If you notice inaccurate information, you have the right to contest it and correct your credit history.

Finally, why is it used? Simply put, To make sure you’re not overpaying for insurance. Research shows that credit scores can accurately predict accident potential. When insurance scores are combined with traditional risk evaluation factors (such as prior claims history, years of driving experience and driving record) insurance companies can more accurately determine the risk an applicant presents. By using insurance scores combined with other factors, policies can be more accurately priced. Individuals who are more likely to have a claim will pay more for insurance and individuals who are less likely to have a claim will pay less.

In 2003, The University of Texas (PDF) conducted an analysis based on 175,647 policies. They found that those with lower credit scores showed to incur more car insurance losses and higher claim payouts, posing a  greater risk to auto insurers.

The Federal Trade Commission (PDF) undertook an independent study to understand the relationship between credit history and risk. They found that credit-based insurance scores are effective predictors of risk.

Looking to save on insurance? Tracking and proactively responding to problems in your credit report could help. Though there is controversy over credit-based insurance scores, they have proven to be an effective means of calculating risk and getting consumers fair and accurate rates. Curious what kind of rate you can get today? Call or locate an agent near you by  using our Locate an Agent feature on the Georgia Farm Bureau website.

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