You may have heard the terms “insurance score” and “insurance credit score” but not really have understood them. Despite the presence of the word “credit,” this has nothing to do with your credit score, but is instead based on the presence or absence of select items on your credit report. These items help an insurance company to aggregate a score to more accurately assess risk.
Items That Impact Your Score:
- 40 percent of your score is your payment history, taking into account that you pay your credit card and other bills such as rent, mortgage, auto, and student loans on time.
- 30 percent of your score is your amount of current debt, also called outstanding debt. These are the items that you are currently paying down.
- 15 percent of your score is your credit history length, or how long you’ve had and been paying on a particular loan or line of credit.
- 10 percent of your score is based on whether or not you are seeking new lines of credit such as loans, credit cards, or store credit lines.
- 5 percent of your score is based on the kinds of credit you have, like credit cards, store credit lines, mortgages, auto loans, and so on.
These are the only items that are considered, and only these types of information are used to determine your insurance score. Only the above information that is on your credit report is used.
Items That Do Not Impact Your Score:
- Race, color, ethnicity, or religion.
- Marital status, gender, or age.
- Income amount or sources such as child support, pension, or other sources.
- Occupation or employment history.
- Location of your residence.
There is some controversy over the use of these scores in determining risk, and not all insurance companies use them. Despite the FTC concluding that the scoring method currently in use adds a significantly accurate degree of risk assessment, it is argued that insurance credit scoring unfairly impacts the poor, African-Americans, and Hispanic Americans as these groups face barriers to credit, and can miss or fall behind on the payments they do have. Bankrate reports on a study by watchdog group Demos that found a disproportionate impact on these groups. Members of these groups made more claims because they were less able to absorb the costs, though their claims were not statistically greater in number or costs.
While intensive lobbying has resulted in insurance credit scoring being legal in most states, not all insurance companies use the scores when deciding to grant or deny insurance. In fact, as late as June of 2014, the Insurance Journal reported that Mississippi Attorney General Jim Hood was still taking credit reporting companies to court over inaccurate credit reports that adversely impacted people’s ability to have a fair and accurate report. Shopping for an insurance company that doesn’t use credit scores takes a little leg work, but it is doable, and they recognize that your late payment on your Visa balance is a lot less important than your clean driving record.