Auto Insurance Scores: The Surprising Truth about How Credit Affects Car Insurance Rates

An insurance score, otherwise known as an insurance credit score, is a rating calculated by insurance companies based off of certain credit report features. It is not directly related to your financial credit score, because this numerical point system is used to predict risk rather than creditworthiness. 

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However, the ways in which your insurance score affects your car insurance rate is pretty on-par with the way credit works. If you have a pretty clean insurance score, then you are seen as low risk to insurance companies, and therefore will likely benefit from lower rates. Conversely, if your insurance scores aren’t looking so hot, your insurance premiums will probably be higher. 

Keep in mind that your insurance scores make up only one determining factor of what your insurance rate will be. Some states have laws barring insurance companies from being able to use credit information to influence insurance premiums. 

How your credit score affects your car insurance rates

Your insurance score is only one of the determining factors insurance companies use when deciding what premiums to offer you. Apart from insurance scores, they will also look closely at:

  • Zip code/area of residence.
  • Age.
  • Make and model of your car.
  • How many miles you drive per year.
  • Driving experience/how many years you have been driving.
  • Accident history or claims history.

When used in conjunction with other factors, your insurance score makes it easy for car insurance companies to determine their risk of insurance losses. Just like any other business, insurance companies need to earn money. While it is their job to be able to cover losses, it’s crucial that they are able to make a profit as well. 

In an effort to do what is best for their business, car insurance companies work with whatever information they can get to make an educated guess on how much you will cost to insure.  

Insurance score factors

Although the precise factors used to determine premiums varies depending on the company, there is one thing they’re all trying to do: determine risk. In other words, it’s safe to say that most insurance companies are probably using a similar set of data to make these decisions.  

However, they may not be paying attention to marks on your credit report that have nothing to do with insurance risk. They may even use some of this information from your credit report but factor it in at different degrees. 

FICO, a company that computes credit scores offers an insurance score that some insurers use to determine risk. Here’s the breakdown on how its calculated:

  • Payment history (40%)
  • Combined debt (30%)
  • Age and length of credit history (15%)
  • Mix of credit (5%)

While some companies rely on FICO’s credit-based insurance score formula for their evaluations, others have their own methods. The following information may not be used to compute your insurance score:

  • Sex
  • Marital status
  • Age
  • Ethnicity
  • Address
  • Income

Although these personal details may be used to determine your monthly premiums, they are not taken into account for your insurance score. 

What factors can damage my insurance score?

Although credit scores and insurance scores are computed differently, they are similar in that the same types of bad decisions can have a negative impact. These actions will likely impact your credit score and insurance score in different ways, or one more than the other. 

Nonetheless, here are some examples of possible factors that can cause damage to your insurance score:

  • Being late on payments.
  • Having a high utilization ratio.
  • Applying for several new credit accounts.
  • Having accounts in collections. 

How getting car insurance quotes affects your credit score

A lot of times, when you apply for credit, your credit score is temporarily lowered. Thankfully, this isn’t the case when it comes to shopping for car insurance. There isn’t a hard inquiry for auto insurance quotes. 

Usually, when shopping for insurance, the company will ask you for a rough estimate of your credit tier so they can give you a quote. Most people don’t know their insurance score off the top of their head, so the credit tier is a sufficient way of getting a fast and easy quote. 

The insurance company will then use your credit tier to estimate your premium so that you can decide if you’d like to purchase their insurance policy. After applying for the insurance policy, the company will request authorization to look over your credit report. This, in conjunction with other information will ultimately determine your insurance premium. 

This is why it is so important for you to give them the right credit tier when you request your quote. If the tier you gave them was inaccurate, your quote will not be accurate. Some companies are aware of this, so to combat error, they will ask you for permission to view your credit information right off the bat. No matter which route is taken, neither one of these methods will count as a hard inquiry on your credit. 

How can I improve my insurance score?

If you want to try to score lower insurance premiums by improving your insurance score, you’ll need to start practicing healthy credit habits. Here are some things that you can start doing to better your insurance score:

  • Get in good standing with any open accounts. 
  • Establish a lengthy credit history.
  • Keep your credit utilization ratio as low as possible.
  • Stay up-to-date on payments.

There are some companies that will even be forgiving in situations where you have been directly affected by a major life event like divorce, serious illness, death of a family member, or related instances. Life happens—if you’ve been struck by any of the above circumstances, call your insurance provider and see if they can lower your premiums.

Final Words

Now that you have learned the ins and outs of insurance scores and the ways that you can negatively and positively impact them, you are well-equipped to work on boosting your scores. A healthier insurance score can open the door to lower insurance premiums, but remember: your insurance score is only one factor influencing your insurance pricing offer.