One of the biggest factors in determining your car insurance rates has nothing to do with your driving record. Lenders commonly use your credit history to determine how risky a driver you will be. Read more about this growing trend and how you can save on auto insurance.
The Car Insurance Industry
Nearly all auto insurance companies use credit data in their evaluations. According to a study by Conning and Co., more than 90% of auto insurers use a credit scoring system called an “insurance risk score” to determine how likely you are to file an insurance claim. Fewer insurance companies use this score to directly calculate your premiums, but there is no denying that your credit may majorly impact your auto insurance options. Insurance companies can also review the insurance risk scores of current customers in order to adjust their rates. Some states (such as Washington) have legal restrictions on how credit data can be used by insurance companies.
Car Insurance Risk Scores
When you apply for auto insurance, the insurer will ask you for permission to check your credit score under FCRA regulations. The insurer will then pull your credit reports from one or more credit bureaus and calculate your insurance risk score based upon this data. This credit inquiry will appear on your credit report but does not usually harm your credit score. An insurance risk score is calculated using a formula that is very similar to the credit scores used for credit and loan evaluations. You can check your credit score online here to get a basic idea of where your insurance risk score stands. Age, income, gender, race, religion, marital status, and geographical data are not included in this score. If your credit score is below 650, you may have trouble finding auto insurance or you may be forced to pay higher rates.
How It Works
Auto insurance companies reference numerous studies showing a correlation between credit history and the likelihood that a consumer will file an insurance claim. Having a good credit score or insurance risk score indicates that you are a trustworthy person who uses your credit and loan accounts responsibly. In turn, your responsible nature indicates to insurers that you are a cautious driver and less likely to get in an accident. Having a low credit score could also indicate that you are under financial stress and this stress may increase your risky behavior. There are many skeptics who insist that there is little correlation between your credit and how good a driver you are, but the reality is that credit can and often does impact auto insurance rates.
Improving Your Risk Score
Like a standard credit score, the following factors influence your insurance risk score:
- Payment history: The largest factor in your insurance risk score is your credit and loan account payment history. A consistent record of on-time payments going back several years demonstrates that you are a responsible person.
- Debts owed: This factor includes the number of debt accounts you currently have, the types of accounts, and their balances. It is best to have a few active and open credit accounts with low balances.
- Length of credit history: This factor calculates how long you have had credit and how long you have kept your individual accounts open. The longer your credit history, the better.
- New accounts: If you have recently opened or applied for several new accounts, this activity could cause a temporary drop in your insurance risk score. Limiting your applications for new credit can help improve your insurance risk score.
- Balance of accounts: The last major factor in your insurance risk score is the balance of credit and loan accounts on your credit report. It is best to have between 2-6 open credit cards on your report along with 1-2 loans. Negative records such as collections, judgments, and bankruptcy filings will harm your score.
If your credit score has negatively impacted your car insurance, work on improving these five factors. Once your credit score is above 650, you can contact your insurance company to ask for a rate adjustment or shop around for lower rates from a new insurer.