Insurance scores: How your car insurance company uses your credit information

Your credit score could be costing you up to $1,500 in insurance premiums — but it’s not the credit score you’re used to. Insurance companies aren’t using the score you’ve seen on TransUnion, Equifax or Experian to determine your insurance prices. Rather, they use something called an insurance rating score, or “insurance score” for short. 

While an insurance score is used to predict whether you’ll be late or delinquent on payments, insurance scores are used to predict whether you’ll file a claim on your auto insurance. More specifically, insurance companies are interested in knowing “whether the cost of your claims relative to your insurance premium will be higher or lower than average,” according to the credit scoring company FICO. 

In practice, there’s only a slight difference between credit scores and insurance scores. Both use information from your credit report, but the categories of information are weighted differently in determining the score. As you can see, insurance scores take weight off of your credit mix (the types of credit you have — mortgages, loans, credit cards, and so on) in order to prioritize your payment history:

Studies on the use of credit in insurance pricing have found that there’s a strong correlation between insurance scores and the likelihood of an insurable loss you’ll file a claim for. However, knowing that there’s a strong correlation doesn’t mean insurance experts know exactly why. The Insurance Information Institute speculates that it could be because people who manage their finances well probably have their cars serviced and repaired before a problem leads to an insurance claim.

Prior to the 1990s, if an insurance adjuster was pricing an insurance policy and didn’t have adequate credit information about a customer, they could price the policy using their own best judgment. As a result, many customers were put into the wrong risk categories and over- or underpaid for their insurance policies. The industry adopted insurance scores to eliminate personal judgment from insurance prices and apply the same criteria to all customers.

Insurance scores don’t use any information that isn’t on your credit report, including age, gender, nationality, ethnicity, address, or income. However, depending on your state, your insurance company may separately use some of that information, like age, gender, and ZIP code, to determine your premiums. That’s because, like insurance scores, studies have shown that they’re useful in predicting whether or not you’ll file a claim.

Whereas the way banks use your credit score is regulated at the federal level, how insurance companies use your insurance score is regulated at the state level. That means that some states restrict the use of insurance scores in policy pricing, some allow broad use, and some ban it entirely. Each state determines what information from your credit report can be used, including:

• Your total available credit
• Items that you’ve disputed and are under review
• How many hard credit inquiries have been made recently (such as when you’re applying for a new credit card or loan — not when you’re checking your credit report
• Debt from hospitals or other medical providers
• Your credit mix

If you don’t have any credit history at all, you probably don’t need to worry: State regulations generally require insurers to consider people who have no credit history to be an average risk. And keep in mind that insurance scores can’t be the only way that your insurance company sets your policy price — they’re one of several factors carriers consider.

While the use of credit information in insurance pricing is controversial, knowing how your insurance company uses it can help you in the long run. You can always ask your carrier to tell you what your insurance score is and what items on your credit report affected it. And the more you can improve your credit, the more you can save.