Your credit history is one of the biggest factors car insurance companies use in determining whether to insure you. In fact, nearly all auto insurers use credit data in their evaluations, and it can often be as important a factor to them as your driving record, unless you live in California, Massachusetts or Hawaii, where the practice is outlawed.

Your ‘Insurance Risk Score’

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.

If you have good credit, an excellent driving history and no insurance claims on your record, you’ll generally qualify for the best available rates.
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How it Works

When you apply for auto insurance, the insurer will ask you for permission to check your credit score under the Fair Credit Reporting Act’s 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. 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.

Do Better Drivers Have Better Credit?

Not exactly. Auto insurance companies do, however, 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 two to six open credit cards on your report along with one to two loans. Negative records such as collections, judgments and bankruptcy filings will harm your score.

If your credit score has negatively impacted your ability to get car insurance, you can work on improving these five factors. You can track your progress using Credit.com’s Free Credit Report Summary. It provides you with a free credit score, plus your personalized snapshot of how you’re doing in those five key areas that make up your credit scores. Once you improve your credit scores, you can contact your insurance company to ask for a rate adjustment or shop around for lower rates from a new insurer.

This article has been updated. It was originally published April 24, 2014.