When it comes to auto insurance, many factors influence the premium you pay. Among these, one critical but often misunderstood factor is your auto insurance score. This score is derived from your credit report and provides insurers with a predictive measure of your likelihood to file claims in the future. But how does your credit information relate to your insurance score, and why does it matter? This post will break it down for you.
The Role of Your Credit Score in Insurance Rates
Auto insurance companies began using credit scores in the mid-1990s to help determine premium rates. They discovered a notable correlation: individuals with lower credit scores were more likely to file insurance claims, while those with higher credit scores were less likely. This relationship has been validated by studies, such as those conducted by the Bureau of Business Research in 2003 and the Federal Trade Commission in 2007.
Although the connection between credit scores and the likelihood of filing claims is well-established, the underlying reasons are not entirely clear. Some suggest that people who manage their finances responsibly are more likely to exhibit responsible behavior in other aspects of life, including driving. Consequently, these individuals may be less prone to accidents. It’s important to note, however, that not all states allow the use of credit scores in determining auto insurance rates. For example, California, Hawaii, and Massachusetts have laws prohibiting this practice.
Credit Score vs. Auto Insurance Score
Your credit score is just one component in calculating your auto insurance score, also known as a credit-based insurance score. Each insurance company has its own formula for determining how much weight to assign to your insurance score when calculating your rate, which explains why your premium may vary from one insurer to another.
To calculate your insurance score, insurers consider:
- Credit score
- Accident history
- Claim history
These details can be accessed through databases like the Automated Property Loss Underwriting System (A-PLUS) and the Comprehensive Loss Underwriting Exchange (CLUE).
Similar to credit scores, insurance scores are three-digit numbers ranging from 200 to 997. Generally, scores below 500 are viewed as poor, while scores above 770 are considered excellent. If you’re curious about your insurance score, you can request a report from LexisNexis or consult your insurance carrier.
Factors That Influence Your Insurance Score
Several companies, such as FICO, develop credit-based insurance scores by analyzing five key areas to gauge how you manage risk:
- Payment history
- Outstanding debt
- Length of credit history
- Pursuit of new credit
- Credit mix
These factors are weighted differently to arrive at your total credit score. It’s important to remember that certain personal details—such as race, religion, gender, marital status, age, income, and where you live—are not included in your insurance score.
Concerns Surrounding Credit and Insurance Scores
While the use of credit and insurance scores in determining auto insurance premiums is widespread, it is not without controversy. Some consumer protection groups argue that this practice may be unfair. Before these scores were commonly used, insurance companies relied on traditional actuarial research to set rates—a process that was slower and less accurate. This traditional method involved developing theories about driver behavior and then gathering data to support or refute those theories.
The inclusion of credit and insurance scores in the underwriting process has improved the alignment of insurance rates with actual risk. Low-risk drivers generally benefit from lower premiums, while high-risk drivers are charged rates that more accurately reflect their risk levels.
Improving Your Credit and Insurance Scores
The good news is that improving your credit score can also boost your insurance score and potentially lower your premiums. According to Consumer Reports, a single moving violation could increase premiums by different amounts depending on your credit score. For example, a driver with an excellent credit score might see a $122 increase per year, while someone with a poor score could see an increase of $1,301 for the same violation.
To enhance your credit score, consider the following steps:
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Address errors on your credit report: According to the FTC, about one in four people have errors on their credit reports. Regularly review your report and dispute any inaccuracies.
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Pay your bills on time: Timely bill payment is a significant factor in your credit score. Consider setting up automatic payments or reminders to avoid late payments.
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Reduce your debt: Your credit utilization ratio, which compares your credit card balances to your credit limits, plays a crucial role in your credit score. Aim to keep your balances low by budgeting carefully and seeking financial advice if necessary.
Finally, don’t forget to explore discounts that might be available from your insurance provider. Bundling policies, completing defensive driving courses, and paying your premium in full rather than in installments are just a few ways to save.
Understanding the link between your credit score and your auto insurance score can help you manage your insurance costs more effectively. By taking steps to improve your credit, you can potentially reduce your insurance premiums and gain peace of mind on the road. For personalized advice on how your credit affects your insurance rates, consider reaching out to your insurance agent.