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Credit-Based Insurance Scores: Do’s and Don’ts for Getting the Best Rates

Dec. 6, 2016
Auto Insurance, Credit Score, Personal Finance
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If you have poor credit, the consequences don’t stop at paying high interest rates or getting declined for a loan. You may also have to pay the price with your insurance bill.

FICO spokesman Jeff Scott says the credit-based insurance score is “a snapshot of your insurance risk at a particular point in time” and is based on the information in your credit report. Scott explained that the assumption is that credit behaviors can be predictive of claim potential; this idea is supported by Federal Trade Commission data.

“Insurers use insurance scores along with other risk information, such as motor vehicle records (for auto insurance), loss history reports, property inspections (for property insurance), and application information to evaluate new and renewal auto and homeowner insurance policies,” Scott said.

As a result, your insurance score could determine whether you’re able to get an insurance policy, and at what rate. For everything you need to know about this important metric — including how to beef up your score — take a look at the do’s and don’ts below.

Misconceptions

DO know that, according to the National Association of Insurance Commissioners, insurance companies are typically not allowed to use your credit-based insurance score as the sole reason for increasing rates or denying or canceling a policy.

DON’T assume your insurance score is the same as your credit score. Although the two are calculated using the same information and both are three-digit numbers with a higher score being better, they have different purposes. Your credit score represents your creditworthiness when applying for credit, and your insurance score represents the risk of you having an insurance claim.

Your rights

DO know your rights based on your state. Some states limit how insurance companies can use your credit history, while others — like Massachusetts, Hawaii and California — have banned the practice entirely. If you have any questions about your rights, don’t hesitate to call your state’s department of insurance.

DON’T think you are without a choice. If you live in a state that allows insurance companies to use credit information, you might still be able to avoid it. The majority of national insurance providers use credit-based insurance scores, but you may be able to find a regional provider that doesn’t.

Your score

DO know where to get your credit report and insurance score. You can get free credit report information updated weekly from NerdWallet, or one report annually direct from each of the three credit bureaus. You can access your official insurance score from LexisNexis for a small fee.

DON’T panic if you have a bad score because of an extraordinary life circumstance, such as the recent death of a spouse, divorce or an extended illness. According to Scott, your insurance score is just one of the many factors insurers consider. If you find yourself in this situation, you can request that the insurance company exclude your credit information from consideration.  Some consumers have had success by taking this route.

The ball is in your court

DO take steps to improve your credit, because your credit-based insurance score is derived from information on your credit report. Steps to improve your credit include checking your report for errors, making payments on time, paying down your debt and spacing out new credit applications.

DON’T feel locked into your current policy. If you’ve improved your credit over a period of time, your insurance company may not update it automatically. Call your provider and ask if it would reconsider your rate based on your current credit information. Also, consider shopping around for a better rate from another insurance company.

The bottom line

If you are looking to save money on car insurance, maintaining good credit can help you get there. If your credit isn’t where you’d like to be, taking steps now to improve it is your best bet. You should also be aware of your rights as a consumer. If in doubt, call your insurance company or shop around for a better rate.

Ben Luthi is a staff writer covering personal finance for NerdWallet. Follow him on Twitter @benluthi and on Google+.

Updated Dec. 6, 2016.