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How Does Auto Insurance Score Affect Your Rate?

auto insurance score

You certainly know that your credit score affects your ability to get a home mortgage or personal loan, but you may not be aware that in certain states, it can also affect your car insurance rate. This means not paying your bills, having high credit card balances, maxing out credit cards, defaulting on a loan, having loans sent to collections, or filing for bankruptcy, can all affect your ability to get a good rate on your auto insurance. Here’s what you need to know in order to position yourself for the best rate.

Credit Score vs Auto Insurance Score

Your credit score and auto insurance score are not the same things, but they can both influence your insurance rate. Your credit score reflects your creditworthiness—whether you’re making on-time payments, keeping balances low, and using credit responsibly— and it’s supposed to predict the likelihood of defaulting on your obligations. Your insurance score, also known as an insurance credit score, is a little different: it predicts the risk of you filing a claim in the future.

3 Reasons Why Insurance Companies Look at Credit Score

It’s unlikely that your car insurance company is looking at your actual credit report. Instead, it receives your credit score, or insurance score, from one or more of the three major national credit repositories: Equifax, Experian, and TransUnion. Some auto insurance companies look at both your auto insurance score and your credit score to set your insurance premiums. There are three states that don’t allow insurance companies to do this: California, Hawaii, and Massachusetts.

Here are three reasons why a car insurance company may be interested in your credit score:

  1. To do business or not: Your credit score tells the insurance company if they want to do business with you.
  2. Customer type: It tells them what type of customer you will likely be if they choose to do business with you.
  3. Credit behavior: There is a belief that your credit behavior is connected to the number and or kind of claims you will make. For companies that follow this belief, those with higher credit scores are seen as potentially filing fewer claims than those who have low credit scores.

No Permission Needed

Insurance companies under the federal Fair Credit Reporting Act (FCRA) are seen as having what is called permissible purpose, giving the insurance companies the ability to have access to your credit information without your permission.

As a consumer, however, you have rights. These include:

  • Notification: You must be given notification that an insurance company has the ability to access your credit report and or personal data. The emphasis here is on notify; they need not seek consent.
  • Right to access: You must be given the right to access the same information they see and have access to.
  • Request to correct: You must be given the right to request corrections to any information that is incorrect.

What is an Insurance Score?

Insurance companies use your auto insurance score to predict the risk of insuring you. Beyond your driving and claims history, there are eight other factors used to determine your auto insurance score:

  1. Do you have any public records to your name? A foreclosure, collection, lien, or bankruptcy are all considered a public record. They can bring your score down.
  2. How often are you on time with payments? On-time payments, as well as late payments, affect your score. The average gap between a due date and when you pay a bill is also considered.
  3. How long have you had a credit history? The longer you have had a credit history, the easier it is for an insurance company to analyze your credit behavior.
  4. How many credit inquiries are on your credit report? The number of new accounts on your credit report influences your score—credit cards, utilities, mortgages, installment loans, and student loans are all considered.
  5. How many credit cards do you have open? The number of cards you have, as well as how much you use them, affects your score.
  6. How many installment loans do you have? The amount of installment loans you have open, especially those opened in the last two years, affects your insurance score.
  7. What types of credit do you have? When it comes to your credit score, it’s helpful to diversify. Having a credit report that only reflects open store credit cards may work to your disadvantage. You want to include store credit cards along with other credit cards, student loans, auto loans, home loans, and installments. The more types of credit you have, the more this factor will work to your advantage.
  8. What is your percentage of unused credit? What do you currently owe? What is your total extended credit among all types? When you are able, you want to keep the amount of credit you use out of your total extended credit below 30%.

Although an insurance company can use these eight factors connected to your credit score in determining your auto insurance score, there are a few factors they cannot use when calculating your rate or premium. These are:

  • Not having a long enough credit history;
  • Medical accounts in collections;
  • A bankruptcy older than seven years;
  • Total line of extended credit;
  • Any score calculated using a person’s monthly income, nationality, ethnicity, home address or zip code, gender, identity, religious affiliation, or marital status.

Average Insurance Score Range

The higher your insurance score is, the more you are considered a low-risk driver. The range of auto insurance scores is not the same as the range of your credit score. Your insurance score is generated by two companies:

  • Fair Isaac Corporation: Your score range can be anywhere from 300-900. A good score is anything over 700.
  • ChoicePoint: Your score range can be anywhere from 300-997. A good score can start at 700 or 800 depending on the insurance company pulling your score.

It is good to know that nothing is uniform. Every insurance company will have different guidelines for what is considered a good auto insurance score. So the best thing to do is to shop around.

Why Does My Auto Insurance Score Matter?

There are two process where your auto insurance score matters: the underwriting process and the rate process.

During the underwriting process, if you are a recurring customer, the decision an insurance company is making is if they should offer you a renewal of your existing policy. If you are a new customer looking for insurance, the decision they are making is if they should offer you a new policy. During the rate process, the decision an insurance company is making is what you should be charged if they choose to offer you a renewal or new policy.

The importance of your auto insurance score throughout these processes is to help the insurance companies make their decisions. The higher your auto insurance score is, the greater chance you have of being offered a policy— it also qualifies you for lower rates and lower priced premiums. The lower your auto insurance score is, the greater the chance that your renewal or new policy will be declined or the terms you are offered may be more than you expected to pay.

Steps to Improve Your Auto Insurance Score

If you have a high credit score, a strong driving history, and few or no accident claims on your record, you could likely be eligible for a low auto insurance rate. On the other hand, if you have bad credit and a low insurance score, you may end up paying more in insurance premiums or have more difficulty obtaining coverage.

If you do find out that your insurance score is low, to avoid paying more for insurance premiums, it’s important to understand that the best way to improve your auto insurance rate is to improve your credit score. Here are a few helpful tips.

  • Pay down debt: Look at the amount of total credit you have extended to you by companies. What percentage of it are you using? Is it above 30%? If so, work at paying down your debt so that you are utilizing no more than 30% of your overall credit.
  • Talk to authorized users on credit cards: If you have an authorized user on any of your credit cards, talk to them. Let them know that you are working on improving your credit score, and are trying to pay down your debt. Ask that they not use the card, or pay off the amount they charge at the end of the month.
  • Use a calendar: Mark your calendar, set payment reminders on your phone, and utilize autopay when possible. These are three ways to make sure you pay your bills on time. A positive payment history without late payments will go a long way in increasing your credit score.
  • Do not close unused credit cards: Keep any unused credit cards you have open. If you close an unused credit card, it will reduce your overall credit limit that has been extended to you— this is more harmful than helpful.
  • Add flavor to your credit types: If you only have credit cards, spice things up by adding some different types of credit to help improve your score.

You may also want to take a look at these seven steps to improve your credit.

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