Credit Repair

Can Your Credit Score Affect Your Auto Insurance Premiums?

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You already knew you had a credit score, but did you know you also have an auto insurance score? The difference comes down to this: Your credit score predicts the likelihood that you will default on your financial obligations, while your auto insurance score predicts whether you will file a future claim.

Of course, in most states, your credit score influences what kind of auto insurance you can get in the first place since insurers will pull your score in order to predict what kind of consumer you will be. Moreover, if your credit score isn’t robust, you’re going to pay the price in your premiums — regardless of your driving history. Let’s look at the nitty-gritty.

Why insurance companies look at your credit score

There are three states — California, Hawaii and Massachusetts — that don’t allow insurance companies to use your credit score as a factor for their determinations. However, there are several reasons the remaining U.S. states can and do look at your score:

  • Simply put, it helps them decide whether to do business with you in the first place.
  • If they do choose to do business with you, they can predict what kind of customer you may be.
  • Your credit behavior could be an indicator of the claims you may make. Some companies believe those with lower scores will potentially make a higher number of claims.

Keep in mind that insurance companies are probably not looking at your actual credit report per se — rather, they are pulling your score from one of the three major credit firms: Equifax, Experian and TransUnion. The score that they pull could either be your credit score or auto insurance score, though some companies look at both.

You should also remember that under the Fair Credit Reporting Act, insurance companies have “permissible purpose” to use your information in conjunction with underwriting. In other words, unless you live in one of the three states that has banned this activity, you have no choice but to accept it.

Credit scores vs. insurance scores

A score is a score, right? Wrong. Let’s look at the difference between credit scores and insurance scores.

Credit scores

  • Give an idea of your propensity to pay your bills on time.
  • Are used by lenders ranging from financial institutions to retail creditors.
  • Come from information in your credit file.
  • Are typically provided by the three credit reporting agencies: Equifax, Experian and TransUnion.

Insurance scores

  • Are based on a model built to predict loss relativity, a barometer of the ratio between the cost of your claims relative to your insurance premiums.
  • Are used by most insurers in most states to evaluate your risk as an applicant and potential policyholder.
  • Are not used by themselves to set pricing or deny coverage to any consumer.

How to check your credit score

One simple way to keep on top of your credit is to check your score on a regular basis. You can do this for free through LendingTree’s credit score tool.

You can also request free copies of your credit reports (from Equifax, Experian and TransUnion) every 12 months at AnnualCreditReport.com. This is a good idea for the following reasons:

  • It is critical to helping manage your financial profile. If you don’t know how that profile looks to lenders, how do you know what you need to do to maintain or improve it?
  • It’s important when you’re building or rebuilding credit, particularly if you’re looking to secure a mortgage or a car loan.
  • It can be the first clue that you’ve been a victim of identity theft. Look for newly opened accounts or any identifying information not belonging to you.
  • It’s a great way of finding and correcting any wrong information. You’ll be able to submit disputes online if you find inaccuracies.
  • It’s free.

How to check your insurance score

Like your credit score, you can get your auto insurance score online for free through some websites. There are fewer sites for insurance scores, but hopefully you’ll need to check them less frequently. These include Credit Karma and The Zebra.

Let’s look at the factors that make up your insurance score:

  • Driving and claims history
  • Public records such as liens, collections or bankruptcy
  • The frequency with which you are on-time with payments — this includes the average gap between a due date and when a bill is paid
  • The length of your credit history — the longer the better
  • The number of inquiries on your credit report
  • Your mix of credit — diversification is key here
  • The number of installment loans you have
  • The number of credit cards you have
  • Your credit utilization ratio, which many experts recommend you keep under 30%

While these elements may be used in calculating your insurance score, there are a few that cannot be used when figuring out your rate. These include:

  • Total line of extended credit
  • Bankruptcies older than seven years
  • Any score using demographics such as:
    • Monthly income
    • Home address
    • Identity
    • Gender
    • Marital status
  • Lack of lengthy credit history
  • Medical accounts in collections

As with your credit score, it’s better to know where you stand than not to know. If the news is good, rejoice — if it’s not so good, you can make your auto insurance score better by:

  • Driving safely. The fewer the claims, the better. This is also good advice in general.
  • Keeping on top of your credit history. It’s free. You have no excuses.
  • Staying — or getting — financially responsible. It’s never too late to change your habits and make your financial picture better.

The bottom line

It’s not enough to keep up with your credit score. If you want to be a legally insured driver, then you will likely want a credit score — and ultimately, an auto insurance score — that is good enough to give you access to the companies you wish to do business with. And remember, there’s no benefit to not understanding your financial picture. It’s best to know what you’re working with, how to maintain the good elements and how to improve the rest.

 

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