In most states, a person’s auto insurance score is one of the factors insurers consider when calculating premiums, along with a range of personal and policy-based parameters, which include age, gender, address, employment, driving history, and coverage limits. In certain instances, however, this credit-based rating can play a huge part in pushing up car insurance rates.
A recent analysis of auto premiums by personal finance firm NerdWallet has shown that the average annual premiums for motorists with poor credit are about 71% higher at $2,792 than for those with good credit at $1,630. The figure is even higher than those for drivers involved in an at-fault collision at $2,462.
A separate study by insurance marketplace Policygenius, meanwhile, has found that while rates for drivers aged 30 to 45 rose 55% from the yearly average of $1,652 to $2,555 after an accident, those for motorists with poor auto insurance scores were 88% more expensive at $3,107. By contrast, policyholders with good credit-based ratings paid 14% less annually at $1,420.
How do auto insurance scores work?
Auto insurance scores, also called credit-based insurance scores or insurance credit scores, were introduced by the Fair Isaac Corporation (FICO) in the early 1990s. This rating system uses a person’s credit information to predict their likelihood of filing a claim. The belief is that motorists with poor credit-based insurance scores are more likely to file a claim than their counterparts with good auto insurance ratings.
Insurance companies also utilize this model to get a picture of how risky it is to cover a driver and how much to charge for coverage.
“Your insurance score is a snapshot of your insurance risk at a particular point in time,” FICO wrote in a guide on its website. “It is a number based on the information in your credit report that shows whether you’re more or less likely to have claims in the near future that will result in losses for the insurance company… The higher your score, the less risk you represent.”
Apart from FICO, data analytics firm LexisNexis and credit reporting agency TransUnion, as well as some insurance companies, have their own scoring systems. Each calculates auto insurance scores differently. Therefore, a motorist’s score may vary between insurance providers.
According to the National Association of Insurance Commissioners (NAIC), however, insurers are not allowed to use credit-based insurance scores as the sole basis for increasing rates or denying or cancelling policies. Some states – namely California, Hawaii, Maryland, Michigan, Massachusetts, Oregon, Utah, and Washington – even prohibit or limit insurance companies from utilizing auto insurance scores in underwriting or rating decisions.
What is a good auto insurance score?
What is considered a “good” auto insurance score differs depending on the credit ratings provider. These companies do not normally disclose how they come up with their ratings, but FICO has revealed on its website a breakdown of the different factors it considers. These are:
- Payment history (40%): Payments made on a person’s debt in the past, including frequency and the amount paid off
- Outstanding debt (30%): Amount of debt a person has
- Credit history length (15%): Amount of time a person has had a line of credit
- Pursuit of new credit (10%): If a person has recently applied for new lines of credit
- Credit mix (5%): The types of credit one has, including credit cards, mortgage, and auto loan
Typically, companies view ratings above 700 as a good score. A good auto insurance rating for FICO starts at 700, while those for LexisNexis and TransUnion begin at 776. The table below shows what these credit reporting entities deem as good and poor score ranges.
Insurance score provider
Good score range
Poor score range
How is auto insurance score different from credit score?
While the factors used to determine a credit score and a credit-based insurance score are the same, these rating systems are not designed for the same purpose. Auto insurance scores are used to predict how likely a driver will file a claim, while credit scores are intended to determine if a borrower is in a stable financial position to secure a loan.
In addition, unlike credit reports, motorists do not have free access to their auto insurance scores. According to personal finance website WalletHub, the only way consumers can check their credit-based scores is by calling LexisNexis Risk Solutions.
According to the global data and analytics company, motorists who already have a reference number from their insurers can get a copy of their credit-based insurance scores, which also includes the top three reasons why they received the rating. For those without a reference number, they can still obtain a copy of their information from LexisNexis Risk Solutions.
FICO and TransUnion, meanwhile, do not provide auto insurance scores to consumers.
Why do auto insurance companies use credit-based scores?
Insurance companies primarily use credit-based insurance scores to determine whether a motorist is eligible for coverage and how much premium they will be charged. But according to FICO, auto insurance scores also help prevent drivers with good credit standings from bearing some of the costs of higher-risk individuals.
“By using insurance scores, insurers can better forecast future performance and thus make sure that each person pays a rate that more closely corresponds to the risk of loss they represent,” the data analytics firm explained. “This means that if you are less likely to have claims that will result in losses for the insurance company, your insurance company can offer you a lower premium.
“And because those that will likely have claims (or larger claims) will end up paying higher premiums, insurance scores help your insurance company make sure that you won't end up paying more than you should to help cover someone else’s future claims.”
How can drivers improve their auto insurance scores?
For motorists who are struggling to maintain a good credit-based score, FICO recommends treating their ratings “a bit like losing weight.”
“It takes time and there is no quick fix,” the firm added. “In fact, quick-fix efforts can backfire. The best advice is to manage your credit accounts and debts responsibly over time.”
To help motorists raise their auto insurance scores and save on car premiums, FICO shared these practical tips:
- Pay bills on time as delinquent payments and collections can have a negative impact on auto insurance scores.
- Be aware that paying off a collection account will not remove it from the credit report as records stay for seven years.
- For those having trouble making ends meet, it is advisable to contact creditors or see a legitimate credit counselor. Though this won't improve their credit-based scores immediately, it can help them manage their credit and pay on time.
- Keep balances low on credit cards and other “revolving credit.”
- Pay off debt rather than moving it around.
- Do not close unused credit cards as a short-term strategy to raise credit score. In fact, owing the same amount but having fewer open accounts may lower a person’s score.
- Do not open new credit cards just to increase available credit. This approach could backfire and lower one’s credit score.
- Do not open a lot of new accounts in quick succession. New accounts will lower the average account age, which will have a larger effect on a person’s score if they do not have a lot of other credit history.
- Re-establish a good credit history. Opening new accounts responsibly and paying them off on time will raise a person’s score in the long term.
- Checking one’s credit report won't affect their score, as long as it is obtained directly from a credit-reporting agency or through an organization authorized to provide credit reports to consumers.
- Apply for and open new credit accounts only as needed.
- Have credit cards – but monitor and manage them responsibly.
- Note that closing an account does not make it go away. A closed account will still appear on the credit report and may impact a person’s score.