What Auto Insurance Companies Use a Credit Score For
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UPDATED: Jul 8, 2021
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Over the years, the insurance company rating process has become much more involved and far more precise. There have been extraordinary advances in technology that have allowed for enhanced data collection and more readily available and detailed consumer information.
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All of this technology provides auto insurers with the means to analyze and adjust their premium rates down to the individual customer. For insurance companies, this means increased profits and fewer losses.
For consumers, this can mean more personalized rate quotes and the potential for more benefits and discounts, as well as the possibility of higher rates.
Using Credit Scores
One important tool in an insurance company’s arsenal is a policyholder’s credit score. A generation ago, credit records were maintained at local credit bureaus. Credit, such as it was, was often limited to a charge account with a small independent store or regional chain.
As unusual as it may appear, your credit score has a direct impact on the rates many car insurance providers will charge you.
Statistically, it has been shown that customers with poor or bad credit are as much as 40% more likely to file a claim than those consumers who maintain an excellent credit profile.
By extension, depending on your credit score, some car insurance companies will charge you anywhere from 20% to 50% more for your annual premiums. Not all companies use a credit score to determine auto policy rates.
Allstate Insurance, the Number Three auto insurer, does not take a credit score into consideration.
Progressive, another top ten auto insurance company, will only look at your credit score if you choose to make installment payments rather than paying the balance in full up front. The state in which you live will also determine if your car insurance company will count your credit score when determining your premium rates.
According to Bankrate.com, there are three states whose laws prohibit the use of credit scores for determining car insurance rates–California, Maryland, and Hawaii–with Massachusetts considering legislation as well.
At one time, the state of Michigan had banned using credit scores for setting insurance rates, but lost a suit brought by auto insurers in 2010.
However, Michigan still restricts what insurance companies are allowed to do with consumer credit information.
Recently, three U.S. Congressmen proposed legislation H.R. 6129, which would eliminate the use of credit scores in determining car insurance rates on a national level.
The bill, authored by Representatives Hansen Clarke and John Conyers of Michigan, and Bennie Thompson of Mississippi–all Democrats–is now being discussed in committee.
What Your Insurance Company Won’t Tell You
According to the U.S. Supreme Court, your insurance company does not have to tell you if they are not giving you their best rates because of information they obtained from your credit report! A ruling by a lower court that did require companies to disclose this information was overturned in 2007.
In essence, the ruling exempted car insurance carriers from provisions of the Federal Fair Credit Reporting Act, which had previously required insurers to notify their customers if their rates were to be increased because of negative credit information contained in their bureau reports.
According to USA Today, you may have an excellent driving history and a spotless record and still not get the company’s best rates. What’s worse is that the insurer is no longer required to tell you if they’re giving you higher rates because of your poor credit history.
Statements by representatives of the Property Casualty Insurers Association of America support the court’s decision.
Insurers believe that their research proves conclusively that drivers with bad credit are substantially more likely to have accidents and file claims than those with good credit.
While a driving record can be amended or change over time, a person’s credit history remains a solid indicator of financial responsibility and how an individual might behave. Analysts believe that behavior that leads to bad credit is difficult to change, and a person’s creditworthiness should be considered when setting auto insurance rates.
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A 2011 New York Times article discussed the differences in rates offered by auto insurers. The article cites a study of 43,000 drivers using credit data supplied by TransUnion, one of the three major national credit reporting agencies.
The TransUnion credit scores typically used by auto insurers are unlike the FICO scores that are used by lenders to determine creditworthiness. The TransUnion scores are more oriented to insurance companies and give more weight to what insurers consider to be high risk factors, such as credit cards which have been maxed out and bankruptcy filings.
The NY Times study found that young adult drivers in the 25-to-34 age group as a whole pay an average of $1,938 per year for auto coverage. This includes liability coverage as well as collision and comprehensive coverage.
All the drivers in the study had clean driving records, but those with an excellent credit score of more than 750 paid considerably less–only $1,155 per year!
This amounts to a savings of 40% for the group with excellent credit.
Drivers with a credit score of between 650 and 750 were found to be paying an average of $1,658 per year, saving about $280 per year.
Motorists with lower scores, between 500 and 650, were being charged an average of $2,023, $80 more than the overall average of $1,938.
Newer drivers, those without any established credit history, are penalized even more and were paying an average of $2,182; 13% more than the $1,938 average cited above.
Even though car insurance premiums will drop as drivers get older, excellent credit scores will still keep auto premiums lower.
It is estimated that over a lifetime, drivers with top credit scores can save as much as $23,000 on their car insurance premiums!
The FICO Credit Score
The Fair Isaac Corporation was founded in 1956 by an engineer and a mathematician in San Rafael, California. By 1987, the company’s all-purpose credit scores had found their way into general use.
Today, the acronym FICO is synonymous with the credit industry. Most all credit-dependent agencies, from banks and financial concerns to insurance providers, use these handy measures of consumer creditworthiness.
The FICO credit score is a composite average consisting of data from five different categories, each weighted for its relative importance in determining the final numeric score.
The five areas reviewed in compiling a FICO score include payment history, amounts owed, the length of the credit history being reviewed, the amount (if any) of new credit, and the kinds of credit used.
Payment history is the biggest component part of a credit score, at 35% of the total. The amounts owed contribute another 30% to the calculation. The length of the credit history is weighted at 15%, and the last two categories are relegated to 10% each. This information can be obtained by visiting the FICO website.
While you may have concerns with one or more of the five credit areas, it is important to remember that a FICO score takes all of the categories into account when gauging your credit score. The relative weight of one factor is dependent on all of the information contained in your credit report.
Another thing to remember is that FICO only considers the information listed above in assigning your score. The company does not consider other factors, such as the amount of time you’ve been in your present job or in your current home.
Your credit score reflects both the negative and positive information that is reported to the three national credit agencies.
Review Your Credit Report Every Year
Financial experts all agree that consumers should regularly review their credit reports, both for content and for accuracy. With patience, hard work, and consistent effort, the behaviors that lead to low credit scores and poor reports can be changed over time.
Understanding what factors are considered in a credit report is an important step.
It is also important to make sure that your credit report is accurate and contains only the information that it should contain. There are far too many instances of credit errors to allow any public report to go unchallenged.
Identity and credit theft is also on the rise, affecting tens of thousands of consumers each year. This is another solid reason to keep a watchful eye on your credit accounts and periodically review your credit report and FICO score.
Get a Free Report
Free annual credit reports are available for consumers at a website sponsored by the three major national credit reporting agencies, TransUnion, Equifax, and Experian. Consumers may request a free report every 12 months in accordance with the federal FACT Act.
The website is a secure site through which consumers may get their free reports. For those consumers without access to a computer or the Internet, credit reports may also be requested by telephone or by mail.
Unlike other websites offering free credit reporting services, Annualcreditreport.com will not pass on your information to other agencies. Consumers will not be contacted for solicitations by e-mail, by direct mail, or by telemarketers, when using this free service.
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