A fender bender isn’t the only kind of accident that can raise your auto premium. Forget to make a credit card payment, and it might cost more to insure your ride.
Most auto, homeowner and other property insurers use a credit-based insurance score to determine how likely it is you’ll file a claim, according to David Snyder, vice president and associate general counsel of the American Insurance Association. It’s similar to how mortgage lenders, banks and other gatekeepers of credit rely on a credit score to figure out the probability you’ll default on payments.
FICO, TransUnion and LexisNexis are among the major providers of insurance scores. About 90 percent of auto insurers and somewhere between 85 percent and 90 percent of homeowners insurers use credit-based insurance scores, says Lamont Boyd, director of FICO’s insurance market. LexisNexis says more than 300 insurance carriers use its scores. TransUnion declined to comment on its market share.
Insurers will use the score, plus other information, to determine what insurance rate they will offer you. For example, auto insurers will consider your driving record and the state where your car is registered, while mortgage lenders will take into account a house’s location and construction materials, among other factors, says Snyder.
Health and life insurers don’t use the credit-based insurance score from FICO. Four states — Massachusetts, California, Hawaii and Maryland — don’t allow one or more types of insurers to use credit-based insurance scores.
What goes into your insurance score?
So, how is your insurance score calculated? Generally, it’s based on information found only in your credit report. However, it’s important to remember the insurance score is not the same as your credit score. While the math behind the two scores often yields similar results, it is different.
“Some factors that drive a credit score are similar to the ones that drive the insurance score,” says Boyd. “But the weight or influence of those factors is different.”
For example, payment history makes up 35 percent of FICO’s credit score; amount owed is 30 percent; length of credit history is 15 percent; and new credit and mix of credit are each 10 percent. That pie is sliced another way for insurance scores. Payment history accounts for 40 percent of the score, while mix of credit is reduced to 5 percent. The rest is the same.
LexisNexis uses payment practices, adverse public records and collections (excluding medical), credit utilization, recent credit activity such as credit inquiries and new accounts, length of credit and the number and types of credit, says John Wilson, director of analytics at LexisNexis Risk Solutions.
TransUnion’s scores are weighted toward age of credit account and stability, which includes a responsible mix and use of credit, says Clifton O’Neal, a company spokesman.
Are insurance scores fair?
“These scores have been studied by the (Federal Trade Commission). It concluded that insurance scores do add a significant degree of risk assessment,” Snyder says.
There are critics, though.
Amy Traub, a senior policy analyst at watchdog group Demos, says that credit-based insurance scores hurt lower-income people more because they are more likely to have lower scores. She noted a study that showed while those with lower scores made more claims because they couldn’t swallow the costs, the cost of those claims were not necessarily greater.
Supporters point to a July 2007 FTC study that shows insurance scores help more consumers save money. The study predicts that 3 out of every 5 consumers would receive a discount rather than a hike to their insurance premiums if credit-based insurance scores were used. The savings vary and depend on several factors other than scores, Snyder says.
Checking your insurance scores
Insurers don’t have to disclose these credit-based insurance scores to consumers. FICO does not provide access to its insurance scores. However, consumers can obtain their LexisNexis auto or home insurance score through its website for a fee. Consumers can buy their TransUnion insurance scores at TrueCredit.com.
Boyd, Wilson and O’Neal agree the best way to insure a higher insurance score is to polish your credit report. That means paying your bills on time, keeping credit card balances low and only opening new credit cards or loans when necessary. Keeping credit reports free of score-killing errors is also a smart move.
“It makes sense that people with higher credit scores would generally have higher credit-based insurance scores,” Boyd says. “Those who pay their bills on time are more likely the ones who keep up with car repairs or home maintenance.”