Know About Your Car Insurance Credit Score – And How It Can Get You Denied
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The National Association of Insurance Commissioners (NAIC) estimates that 95% of auto insurers conduct credit checks when calculating car insurance premiums.
Your credit history is important, as auto insurance companies may legally assess consumer credit information when making decisions such as when determining insurance rates in most states.
How Does A Credit Score Affect Car Insurance Rates?
Auto insurance companies access credit information from the consumer credit bureaus to guide them when determining auto insurance rates. The following table illustrates how a consumer’s credit history can impact car insurance rates.
Average Annual Cost of Insurance Impacted by Credit Scores
| Very Good | $ 1,508 |
| Average | $ 1,829 |
| Bad | $ 2,940 |
Source: ValuePenguin
Another national study found that those with poor credit-based insurance scores paid up to 76% higher premiums — more than $1,100 annually on average.
Public advocacy groups, including the Consumer Federation of America, remain opposed to allowing a car insurance company to consider a driver’s credit rating when calculating coverage premiums because they question the relevance and feel it unfairly harms lower-income groups.
The Insurance Information Institute (III) explained the historical reasons why insurers review the credit reports of applicants for car insurance. Data has shown that consumers with lower insurance credit scores are more likely to file insurance claims.
Keep in mind that credit-based auto insurance scores are one of many potential factors that insurers may consider when calculating car insurance rates.
What Credit Score is Good for Car Insurance?
First, we must define what constitutes a poor credit score: fair, good, etc. According to FICO, the approximate credit scoring ranges are:
- 800+: Excellent
- 740-799: Very Good
- 670-739: Good
- 580-669: Fair
- Below 580: Poor
Conversely, an “insurance score” or an insurance credit score ranges from 200 to 997, with lower credit scores equating to higher risk from the perspective of a car insurance company.
Based on the internal guidelines of the auto insurance company, what is deemed as being a good insurance credit score will vary. Investopedia states that perfect insurance scores are rare, 770 or more is considered favorable, and 500 or lower is classified as poor.
Looking at another source, Progressive, a national insurance company, describes insurance scores as “mostly calculated” from your auto insurance claims history and credit score. They confirm the overall range of 200 to 997 and assess insurance scores as follows:
- 776-997: Good
- 626-775: Average
- 501-625: Below Average
- Under 500: Poor
Insurance companies are not obligated to disclose the insurance score they have calculated or provide a detailed formula for calculation.
How is Your Insurance Score Calculated?
The NAIC explains that auto insurance companies rely on credit-based insurance scores as one of many factors that make decisions regarding rates, coverage, and others.
For example, NAIC explains that a variety of factors may be considered such as the zip code of the consumer, the vehicle’s year, make, and model, and the estimated mileage that the driver will annually travel.
The III stated that certain information may not be included by insurance companies when calculating an insurance score. Common examples include race, ethnicity, religion, or disability.
As was aforementioned, your credit score is a key component of your insurance score. FICO’s credit scoring model consists of the following estimated factors and corresponding weight of importance:
- Payment history (35%): The largest single factor is your documented history of using credit, as this is considered a strong indicator of future behavior and outcomes.
- Outstanding debt (30%): Although having a substantial amount of overall debt in itself does not necessarily indicate risk, having a high credit utilization rate can. This rate or ratio is the percentage of your overall available credit that you are currently using.
- Credit history length (15%): In addition to a good history of making timely payments, lenders prefer to see a multi-year history of responsible management of accounts.
- New credit accounts (10%): To a limited extent, lenders view multiple new applications for credit or the opening of several accounts as a possible indicator of recent, unforeseen financial problems.
- Credit mix (10%): Most lenders generally prefer that a consumer demonstrates responsible management of two or more types of credit, i.e., revolving credit card accounts or installment accounts, such as car loans.
Other key factors that insurance companies may consider when assessing auto insurance scores include your recent accident history and claims history.
How to Improve Your Credit Score
Because your credit score is a large factor in determining your insurance score and rates, those with bad credit are encouraged to make efforts to improve their credit history.
Improve Your Credit Score
Establishing credit and consistently making timely payments is an integral part of boosting your credit. Those with bad credit or lacking any credit-related activity on their credit report may consider pursuing a credit builder loan opportunity from CreditStrong.
CreditStrong is a division of an established, FDIC-insured bank in Texas that offers credit builder loans for consumers seeking to improve their credit report by securing a type of installment loan.
A credit builder loan differs from traditional loan options, as the loan funds are deposited and secured in a savings account throughout the term. Each month, the borrower is responsible for making a single, fixed monthly payment toward the balance.
The loan repayment process allows for bolstering your length of credit history, as CreditStrong will regularly report the loan activity to all three major credit bureaus so this updated credit information and activity appears on your credit report.
After you have made all of the loan payments, the funds contained in the savings account are made available for you, which will also likely have accrued some interest along the way.
Be a Good Driver
Your driving history is a large factor that insurance companies consider when assessing the level of risk associated with a motorist. Avoid accidents and traffic violations to maintain a “clean” driving record.
Insurers recognize that past behavior and performance are among the best indicators when assessing the future likelihood of risk. Like prospective lenders will check an applicant’s credit history, insurance companies will want to review your driving record.
In most cases, insurance companies will review a motor vehicle report (MVR) that is maintained by a state agency where you reside. Generally, your MVR will contain any accidents or traffic infractions that have occurred in the past three to five years — but that may vary.
Among the most damaging MVR entries are criminal convictions like operating under the influence of alcohol or driving while under a license suspension. Most insurers classify drivers with a history of these types of infractions as “high risk”.
Be Financially Responsible
Consumers should commit to maintaining a comprehensive financial strategy to minimize unnecessary expenses including higher auto insurance rates and higher interest rate loans.
Consider creating a centralized summary of all your accounts and financial data using an electronic application. Smart consumers will create a monthly budget containing critical information including income, expenses, payment due dates, etc.
Other best practices include limiting unnecessary credit card spending, saving some money for emergencies, and looking for possible ways to responsibly build credit.
Be sure to make your existing car insurance premium payments on time, as having a lapse in coverage from cancellation may lead to higher rates. Drivers with even less than a 30-day lapse in coverage pay an average increase of 8% in their rates.
Establishing and maintaining a good insurance score requires a conscientious effort to establish responsible habits. For example, remaining alert and conscious when driving, making timely payments on all accounts, and checking your credit report annually for any potential errors.
These habits impact your credit score and car insurance rates.
CreditStrong helps improve your credit and can positively impact the factors that determine 90% of your FICO score.
