We've experienced it firsthand again and again: We start talking about insurance score and rate factors, and someone inevitably uses "insurance score" and "credit score" interchangeably. And every time, we cringe. Why? Because there are some major differences between the two, and knowing each score's characteristics is one step closer to understanding your insurance rate.
Credit and Insurance Score Purposes
Credit Score: To show lenders how likely you are to repay a debt.
Insurance Score: To show insurance providers how likely you are to have a claim.
Credit and Insurance Score Scales
Credit Score: FICO—300 to 850
Insurance Score: LexisNexis Attract—Below 500 to 997
Credit and Insurance Score Authority
Credit Score: Lenders CAN deny you loans and lines of credit based on your credit score alone.
Insurance Score: Insurance providers CANNOT deny you coverage based on your insurance score alone. Insurers can deny you for other reasons, like your driving record, but as far as insurance score, it can only affect the price of your premium.
Factors that Play Into Each Score
Once people discover an insurance score is different than a credit score, the next step is to assume credit scores deal with credit factors while insurance scores deal with insurance factors. Unfortunately, that's not the case. Both credit score and insurance score use credit report data for their scoring models, which means both scores pay attention to things like payment history, credit limits and variety of credit.
Credit and Insurance Score Scoring Models
While the credit score and insurance score both pull in credit report factors, their scoring models examine and weight the data differently.
Credit Score: Most people are pretty familiar with the concept of a credit score and can usually draw parallels between their financial behaviors to their overall score, especially if they know which factors are considered most important. The FICO® score is broken down into five parts, each with their own percentage of weight: Payment History (35 percent), Amounts Owed (30 percent), Length of Credit History (15 percent), Credit Mix (10 percent) and New Credit (10 percent).
Insurance Score: The insurance score scoring model is a lot less intuitive. How in the world does opening a new credit card account have anything to do with insurance? Well, even though there is no direct connection between finances and insurance, we can assure you it's all related when it comes to risk statistics. By looking at crash and claims data, researchers have found a person's financial responsibility translates to driving responsibility. So with such a strong correlation, an insurance score model is able to pair financial behaviors with claim and profitability stats in an algorithm that cranks out a score.
The insurance score has nothing to do with your driving record or claims history, unless an insurance company specifically requests a score provider to factor those things in. At Say, we factor in your driving record separate from your insurance score, so we choose to get untailored scores from LexisNexis.
If It's Credit-Based, Does the Insurance Score Favor the Rich?
While credit scores in insurance rating can be controversial, the insurance score is different. The insurance score is based on how a person interacts with their finances versus what kind of income they have or how much money is in their accounts. It shouldn't matter if the monthly bill is $10 or $1000, if a person consistently pays that bill on time every month, they'll have a better score. And unlike a loan, a driver's salary is never considered for their insurance score.
Many behaviors the credit score and insurance score look for are similar: don't reach your credit limit too often, make payments on time, work to have long-standing accounts that build up your credit history, etc. However, due to the different way these behaviors are analyzed and the specifics taken into account, it is entirely possible to have a great credit score and a poor insurance score and vice versa.
Don't know your insurance score? Get a quote with Say and receive yours for free.
Posted August 18, 2017 in insurance know-how.