An insurance score is a number based on your credit history that is used to predict your likelihood of filing an insurance claim and costing an insurer money. Auto insurance scores, also called credit-based insurance scores, can be used to set car insurance premiums everywhere except for Massachusetts, Hawaii and California.
The credit-scoring company FICO created the first insurance scores in 1993, and today FICO estimates that 95% of all personal insurers take insurance scores into account. FICO scores are based on five categories: 40% past payment history, 30% current level of indebtedness, 15% length of credit history, 10% new credit, and 5% variety of credit types. Multiple studies, including one by the Federal Trade Commission, demonstrate that the scores effectively predict risk for insurers, which is logical because individuals who responsibly handle their finances figure to be equally responsible with their cars or homes.
Insurance Score Companies
Insurance scores rely on information from your credit reports and are formulated by three main companies: FICO, LexisNexis, and TransUnion.
FICO insurance scores range from 250 to 900.
LexisNexis scores range from 300 to 950.
TransUnion scores fall between 150 and 900.
In general, insurance scores of 770+ are considered good, but the specifics vary based on the type of insurance score, given the different ranges.
How to Raise Your Insurance Score
Your credit information strongly influences your insurance score, so raising your credit score can decrease your car insurance rates. You can get personalized advice on how to improve your credit score, as well as how long it will take, using the Credit Analysis feature of your free WalletHub account.
Controversy Over Insurance Scores
Since the connection between credit history and insurance risk isn’t immediately clear to the average consumer, many people and advocacy groups disagree with the use of insurance scores. Even the FTC admits that insurance scores correlate with race and ethnicity, which has led to some protections for consumers.
For example, in states like Texas, insurers cannot refuse you coverage or increase your premium if your score decreased due to divorce, temporary unemployment, identity theft, the death of a close family member, or a similar life event. You can send a request in writing to an insurance company if one of these events affected your insurance score.
Similarly, New York law requires insurance companies to ignore credit as a rating factor for consumers with no credit, or to handle these consumers in another approved way, like treating the lack of credit the same as a neutral score. To find similar regulations in your state, visit its department of insurance website.
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