UPDATED: Mar 13, 2020
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When you borrow money, the lender checks your credit score. When you buy car insurance, the insurer checks your insurance score. The two scores work in a similar way, but they’re officially two different things. Today, we’re explaining everything you need to know about the difference between a credit score and an insurance score.
What is an Insurance Score?
An insurance score, also known as a credit-based insurance score, indicates whether you are more or less likely to have insurance claims in the near future. The insurance company uses your insurance score to calculate your insurance premiums. In order to make money, the insurance company needs to determine how risky you are as a policyholder. What is the risk that you will make a claim and cost the insurance company money in the future? If your credit-based insurance score is bad, then the insurance company will charge higher premiums. If your score is good, then you should have lower premiums, all other things being equal.
There are plenty of similarities between your insurance score and your credit-based insurance score. Both numbers are based on your current credit report data, and both numbers are based on FICO’s model of credit scoring.
Generally, if you have a good credit score, then you will also have a good credit-based insurance score. However, this isn’t always the case, and there are some differences in the way a credit-based insurance score and traditional credit score are calculated.
What’s the Difference Between a Credit Score and a Credit-based Insurance Score?
Both your credit score and your insurance score are based on the same type of data. They’re based o n the FICO credit score model, which is designed to assess your risk as a borrower. How likely are you to pay back a loan? How many times have you paid back loans in the past? Have you previously managed your credit responsibly? A credit score is designed to answer these questions, helping a lender provide you with the best possible rate.
However, buying insurance is not like getting a mortgage. Credit risk scoring models are designed to predict the likelihood that you will become delinquent when repaying borrowed money. Credit-based insurance scores, meanwhile, are built to predict the “loss relativity” of any individual. Loss relativity allows the insurance company to decide if your insurance premiums will be higher or lower than the average.
Based on all of this information, how exactly do your credit score and credit-based insurance score differ from one another? The two numbers use the same inputs but involve completely different mathematical equations. The same information in your credit report will appear in your insurance score, but the information may be weighed or scored differently.
Some of the items included in your insurance score include:
- Length of your credit history
- Number of accounts in good standing
- Payment history
- Credit utilization rate
- Collections accounts
- Recent applications for credit
These are the exact same things that go into calculating your credit score. Again, however, they’re scored differently when used to calculate your credit-based insurance score.
How to Improve your Insurance Score
A driver with a good credit-based insurance score can save 15 to 20% per year on annual insurance premiums. So how can you improve your score?
Generally, the same strategies you use to improve your credit score can be used to improve your insurance score. Be responsible with your credit. Pay down all credit debt as quickly as possible. Open new accounts and manage your credit responsibly. Avoid carrying a balance on your credit cards.
Your Insurance Score is One of Many Factors Used to Calculate Premiums
Your credit-based insurance score is one of several factors used to calculate your insurance premiums. If you have a good credit-based insurance score, then it will certainly help you get lower insurance premiums. However, it’s not guaranteed. Similar, if you have a bad credit-based insurance score, then you’re not necessarily stuck paying higher premiums.
Furthermore, insurance companies use credit-based insurance scores in different ways. Some companies place a heavy emphasis on your credit-based insurance score. Other companies virtually ignore your score. In some states, insurers are prohibited from using certain data when calculating your premiums, like your income, race, or disability status. In these states, an insurance company might be more likely to use your credit-based insurance score.
Other factors that go into calculating your insurance premiums include your:
- Motor vehicle report
- Claims history report
- Other demographic data
If you’re a 20 year old male with an excellent credit-based insurance score, then you will likely pay different premiums than a 45-year old female with that same credit-based insurance score. There are plenty of other factors that go into calculating your insurance premiums.
Nevertheless, a growing number of insurance companies are using credit-based insurance scores to calculate premiums. Insurance companies like using this score because it leads to better consistency across rates, fairer decisions, and a more efficient application process.
Certain States Prohibit Insurance Companies from Using your Credit Score
Insurance companies in most states in America can use your credit score to charge higher or lower insurance premiums.
However, insurance companies in Massachusetts, California, and Hawaii are prohibited from using credit scores or credit-based insurance scores to determine rates. If you’re applying for car insurance in these three states, then your credit score should have no effect on car insurance premiums.
Ultimately, a credit score is a score that rates your likelihood of defaulting on a loan as a borrower. Your insurance score, also known as your credit-based insurance score, is a score that rates your likelihood of making a claim on your auto insurance policy.
The two numbers are calculated in similar ways and are based off the FICO credit scoring model. Generally, if you have a good credit score, then you will also have a good credit-based insurance score. However, having a good credit-based insurance score does not guarantee cheaper premiums because insurance companies use a number of overall factors to calculate premiums.