Learn how your credit score influences the price of your auto insurance. Know about the various insurance-based credit ratings used by insurers to determine the premiums.
Look at how you can boost your credit score and how you can get a better deal on auto insurance.
What is a Credit Score?
It’s a three-digit number that represents a person’s creditworthiness based on their credit history. In other words, a credit score is a numerical representation of a person’s probability of repaying a loan.
Insurance firms determine an individual’s credit score based on the following main factors:
- Credit history in total
- Person payment history, as well as the reasons for late payments
- Credits used by the user, such as a credit card or a mortgage, and so on.
When determining the premium for an auto insurance policy, insurance providers look at an individual’s credit score. This article will explain the relationship between credit score and auto insurance.
It’s not only necessary to have good credit when applying for a loan or credit card; it can also save you money on auto insurance as well. To help calculate the monthly rates, most of the leading car insurance providers in the United States use a credit-based insurance score.
In states where credit-based insurance is legal, approximately 95 percent of auto insurers use it, according to FICO. California, Hawaii, and Massachusetts are the only states where the practice is prohibited.
Why Auto Insurance Companies Care About Your Credit History?
FICO launched the credit-based insurance score in 1993, but it wasn’t until 2003 that University of Texas researchers conducted the first major independent study on the subject.
They looked at more than 175,000 policies and discovered that the average claim loss for the lowest 10% of credit scores was $918, while the average claim loss for the highest 10% was $558. They also found that losses increased steadily as credit scores decreased.
The Federal Trade Commission (FTC) issued its study in 2007, concluding that credit-based insurance scores are appropriate risk predictors for auto insurance policies.
They are particularly good predictors of the amount of claims policyholders file and the overall cost of such claims to insurers. As a result, insurers have discovered that using credit-based insurance ratings to deliver lower premiums to people with stronger credit makes sense.
Types of Credit-Based Insurance Scores
The FICO Insurance Score and the LexisNexis Attract Score are the two most popular credit-based insurance scores used by insurers. This score is based on your credit report, not your C.L.U.E. report, which contains a seven-year history of damages you’ve claimed on previous and current cars.
1. FICO Insurance Score
FICO is specific about what factors it takes into account when calculating the credit-based insurance score, and it’s not the same as its general credit score.
It looks at many of the same factors but assigns them different weights, such as:
- Past payment history (40%)
- The current level of indebtedness (30%)
- Amount of time credit has been in use (15%)
- Pursuit of new credit (10%)
- Types of credit experience (5%)
Experian, Equifax, and TransUnion, the three main credit bureaus, measure the FICO Insurance Score for insurers based on their records. FICO doesn’t list a range.
2. LexisNexis Attract Score
Although LexisNexis doesn’t provide much detail about the factors that go into your LexisNexis Attract Score, insurers take note of the following:
- Length of credit history
- Payment history
- Amount of debt
- Recent credit inquiries
- Accounts in good standing
Any of the three credit bureaus can be used to calculate your score. Here’s how the score is calculated:
- Good: 776 to 997
- Average: 626 to 775
- Below average: 501 to 625
- Less desirable: Under 500
How does Credit Score Influence the Premium for Car Insurance?
Better the credit score of an individual, the lower will be his car insurance premium. Car companies offer good attractive premium rates to individuals whose credit score is good. A person with poor or no credit scores has to pay higher insurance premiums.
Furthermore, having a good credit score qualifies an individual for various car insurance policy add-on features.
Age, gender, and income are not taken into account when determining a credit score. It just represents the tendency of a person to pay his debts on time. Paying bills on time, keeping credit card balances low, and paying off debts on time all help to increase a person’s credit score.
Finally, much like auto insurance, the scores can be verified using the internet. Car insurance based on credit score allows insurers to provide the best premium to the customer. Maintaining a good credit score is essential for getting the best car insurance with useful add-on features and an easy claim procedure.
Ways to Improve Your Credit Score
1. Check your Credit Report
Checking your credit report is one of the most critical things you can do to increase your credit score. This will assist you in finding errors in your report. If you notice flaws in your report, you must correct them right away. Since your credit score is calculated using information from your credit report, you must double-check that it’s error-free.
2. Pay Outstanding Bills
If you have some unpaid credit card bills or loans, you must pay them off right away to restore or boost your credit score. When determining a credit score, one of the factors that are taken into account is payment history. Your credit score would be poor if you have a history of late payments and vice versa.
3. Credit Utilization
It is another important aspect that is taken into account when determining a credit score. The amount of credit that is available to you versus how much of it you are using shows your dependency on credit money. It is recommended that people keep their credit utilization under 30%. Keep track of how much money you spend on credit if you have several credit cards.
Since your credit score plays a big role in determining your auto insurance rate, it’s crucial to keep your credit history in good condition. If it isn’t, begin practicing good credit habits to boost your score.
Don’t stop there, though. Instead, think about how you can reduce your insurance premiums to increase your monthly cash flow.