6 min
Credit-Based Insurance Scores Explained: What Drivers Need to Know
Your credit-based insurance score can have a significant impact on your car insurance rates, sometimes even more than major driving infractions like a DUI. Understanding what a credit-based insurance score is, how it is calculated, and how it differs from your regular credit score can help you better navigate your insurance options and costs.
Summary
Your credit-based insurance score can have a significant impact on your car insurance rates, sometimes even more than major driving infractions like a DUI. Understanding what a credit-based insurance score is, how it is calculated, and how it differs from your regular credit score can help you better navigate your insurance options and costs.
🚗 What is a Credit-Based Insurance Score?
A credit-based insurance score is a number used by insurers to estimate how likely a person is to file an insurance claim. Companies such as LexisNexis and FICO create models for these scores, which have proven effective at predicting insurance risk according to studies. Drivers with poor insurance credit scores tend to file more claims, and insurers use this information to determine premiums. In fact, poor credit can sometimes affect auto insurance rates even more severely than serious driving offenses like DUIs. While federal law allows insurers to use these scores, states like California, Hawaii, and Massachusetts prohibit it. Importantly, insurers are not allowed to use credit history as the only reason for raising rates, denying, or canceling policies.
Takeaways:
• A credit-based insurance score predicts the likelihood of filing claims, influencing insurance premiums.
• Federal law permits the use of credit scores in insurance pricing, though some states restrict it.
• Poor credit can lead to higher rate increases than some major traffic violations.
Key Terms
• Credit-Based Insurance Score: A numerical score estimating how likely someone is to file an insurance claim.
• LexisNexis and FICO: Data analytics companies that develop credit-based insurance scoring models.
• Premium: The amount paid for an insurance policy.
📊 Credit-Based Insurance Score vs. Regular Credit Score
Although they may sound similar, a credit-based insurance score and a standard credit score serve different purposes. Regular credit scores, like FICO or VantageScore, estimate the likelihood of repaying borrowed money. In contrast, credit-based insurance scores estimate the probability of filing an insurance claim. Both use similar data but weight factors differently. For instance, FICO insurance scores prioritize payment history, outstanding debt, credit history length, pursuit of new credit, and credit mix. Negative factors like missed payments, little credit history, frequent hard inquiries, and high credit utilization can lower your insurance credit score. However, personal demographics such as gender, race, marital status, and income are not considered in these scores.
Takeaways:
• Credit-based insurance scores and regular credit scores have different objectives and weighting.
• Factors like payment history and outstanding debt significantly impact insurance credit scores.
• Personal characteristics are excluded from credit-based insurance score calculations.
Key Terms
• FICO: A major analytics company that develops credit scoring models.
• Hard Inquiry: A credit check initiated when applying for credit, which can impact your score.
• Credit Utilization: The ratio of credit card balances to credit limits.
📈 What’s a "Good" Credit-Based Insurance Score?
There’s no universal definition of a good credit-based insurance score because each insurer sets its own standards. Companies may use different scoring ranges, making direct comparisons tricky. For example, LexisNexis uses a range from 200 to 997, with anything above 776 considered good. TransUnion suggests that a score around 770 is favorable. Although there are no rigid benchmarks, generally, the higher the score, the better the rates offered to consumers. It's also worth noting that while a good general credit score often correlates with a good insurance credit score, this isn't guaranteed.
Takeaways:
• Each insurer sets its own thresholds for what it considers a "good" credit-based insurance score.
• Scoring ranges vary depending on the scoring model used.
• A higher score generally leads to better insurance rates.
Key Terms
• LexisNexis Risk Solutions: A provider of data and analytics for insurance risk assessments.
• TransUnion: One of the major credit reporting agencies offering insurance score assessments.
🚘 Average Car Insurance Rates for Poor Credit
Drivers with poor credit typically pay significantly more for auto insurance. On average, someone with poor credit can expect to pay $3,455 per year for full coverage, compared to $2,148 for someone with good credit. Minimum coverage rates follow a similar trend. These differences highlight how seriously insurers weigh credit-based insurance scores. Despite this, rates can vary widely among insurers, making it crucial to compare options.
Takeaways:
• Poor credit significantly increases car insurance premiums.
• The cost gap between poor and good credit drivers can exceed $1,300 annually for full coverage.
• Shopping around is important to find better rates even with poor credit.
Key Terms
• Full Coverage: Insurance that includes liability, comprehensive, and collision protection.
• Minimum Coverage: The minimum legally required car insurance based on state laws.
🚙 Do All Insurers Use Credit-Based Insurance Scores?
Most auto insurers—around 95%—use credit-based insurance scores to set rates. However, some insurers are starting to move away from this model due to concerns over fairness and consumer protection. For example, Root Insurance has announced plans to eliminate credit scores from its pricing by 2025, and Texas-based Dillo offers quotes without credit checks. Nonetheless, depending on where you live and the companies operating there, finding an insurer that doesn’t use credit scores can still be challenging.
Takeaways:
• About 95% of auto insurers use credit-based insurance scores when setting rates.
• Some companies are beginning to remove credit scoring from their pricing models.
• Location and insurer availability influence whether no-credit-check options are accessible.
Key Terms
• Root Insurance: A company pledging to eliminate credit-based scoring by 2025.
• Dillo Insurance: A provider offering no-credit-check car insurance in Texas.
🏆 Best Insurer for Good Drivers With Poor Credit
Among major insurers providing rate data, American Family offers the best rates on average for good drivers with poor credit. Good driver profiles are defined as individuals with clean driving records and credit considered "good" rather than excellent. USAA offers lower rates overall, but it is only available to military families. Regardless of insurer, full coverage policies include comprehensive, collision, liability, and other required protections, ensuring drivers have extensive coverage even with credit challenges.
Takeaways:
• American Family generally offers the best rates for good drivers with poor credit among large insurers.
• USAA rates are lower but restricted to military-affiliated individuals.
• Full coverage policies provide broader protection regardless of credit standing.
Key Terms
• American Family Insurance: A major insurer known for competitive rates for drivers with poor credit.
• USAA: An insurer serving military members, veterans, and their families.
Conclusion
Understanding your credit-based insurance score can help you take more control over your car insurance costs. Although many insurers use credit scores as a significant rating factor, changes in the industry and shopping around for quotes can open doors to more affordable coverage. Being aware of how credit affects insurance pricing gives you a better chance of finding a policy that fits your budget and needs.
