Understanding Your Auto Insurance Score’s Significance in Shaping Your Financial Future

Meanwhile, a separate study by insurance marketplace Policygenius found that while rates for drivers aged 30 to 45 rose 55% from an annual average of $1,652 to $2,555 after a year. accident, drivers with less expensive auto insurance scores were 88% more expensive at $3,107. In contrast, policyholders with good credit ratings paid 14% less per year at $1,420.

Read more: Revealed – the most expensive and least expensive states for car insurance in 2022

How does auto insurance score work?

Auto insurance scores, also known as credit-based insurance scores or insurance credit scores, were introduced by the Fair Isaac Corporation (FICO) in the early 1990s. This rating system uses credit information. use of a person 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 drivers with good auto insurance ratings.

Insurers also use this model to get a picture of the risk when insuring motorists and premiums.

“Your coverage score is a snapshot of your insurance risk at a particular point in time,” FICO writes in a guide on its website. “It’s a number based on information on your credit report that shows you’re more likely to have a claim in the near future resulting in a loss for the insurance company… The higher your score, the better your score. less risk. ”

In addition to FICO, data analytics firm LexisNexis and credit reporting agency TransUnion, as well as several insurance companies, each have their own scoring systems. Each car insurance score is different. As a result, a driver’s score can vary between insurance providers.

However, according to the National Association of Insurance Commissioners (NAIC), insurers are not allowed to use credit-based insurance scores as the sole basis for rate increases or denials or cancellations. contract. Some states — specifically California, Hawaii, Maryland, Michigan, Massachusetts, Oregon, Utah, and Washington — even ban or restrict insurers from using auto insurance scores in underwriting or rating decisions. class.

Read more: Insurance commissioners will prohibit the use of credit scores for insurance pricing

What is a good auto insurance score?

What is considered “good” auto insurance varies depending on the credit rating provider. These companies usually don’t disclose how they come up with their ratings, but FICO has revealed on its website a breakdown of the different factors they consider. That is:

• • Payment history (40%): Past payments to a person’s debt, including frequency and amount paid off

• • Outstanding balance (30%): Amount of debt a person has

• • Credit history length (15%): The amount of time a person has a credit line

• • Pursuing New Credit (10%): If a person has recently applied for a new line of credit

• • Credit mix (5%): Types of credit available, including credit cards, mortgages and auto loans

Typically, companies consider a rating above 700 to be a good score. Good auto insurance ratings for FICO start at 700, while ratings for LexisNexis and TransUnion start at 776. The table below shows what these credit reporting agencies consider good and good. least.

_{Source: WalletHub}

Read more: Revealed – the most expensive and least expensive cars to insure in the US

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 be to claim, while credit scores are used to determine if a borrower is in a stable financial position to secure a loan. are not.

Also, unlike a credit report, car drivers don’t have free access to their auto insurance score. According to personal finance website WalletHub, the only way consumers can check their credit-based score is by calling LexisNexis Risk Solutions.

According to the global data and analytics firm, motorists who already have a reference number from their insurance company can receive a copy of their credit-based coverage score, which also includes three reasons: due to the top causes them to receive ratings. For those who do not have a reference number, they can still obtain a copy of their information from LexisNexis Risk Solutions.

Meanwhile, FICO and TransUnion do not provide auto insurance scores to consumers.

Why do auto insurance companies use credit-based scores?

Insurers primarily use credit-based coverage scores to determine if motorists are eligible for coverage and how much premiums they will have to pay. But according to FICO, auto insurance scores also help prevent drivers with good credit ratings from bearing some of the costs of higher-risk individuals.

The data analytics company explains: “By using coverage scores, insurers can better forecast future performance and thus ensure that each person pays a proportionately higher rate. more closely with the loss risk they represent”. “This means that if you are less likely to have a claim resulting in a loss to your insurance company, your insurer may be able to offer you a lower premium.

“And because those who are likely to have a claim (or larger claim) will end up paying higher premiums, coverage scores help your insurer ensure that you won’t pay.” more than you should to help cover someone else’s future claims.”

How can motorists improve their auto insurance scores?

For drivers who are struggling to maintain a good credit-based score, FICO recommends treating their rating as “like losing weight.”

The company added: “It takes time and there is no quick fix. “In fact, quick repair efforts can backfire. The best advice is to manage your credit and debit accounts responsibly over time.”

Read more: Ten ways motorists can save on auto insurance premiums

To help motorists improve their auto insurance scores and save on auto insurance premiums, FICO has shared these practical tips:

• • Pay bills on time as past due payments and collections can have a negative impact on auto insurance scores.

• • Note that paying with a collection account won’t remove it from your credit report, since records stay for seven years.

• • For those who are having trouble making a living, you should contact your creditors or see a legitimate credit counselor. While this won’t immediately improve their credit-based score, it can help them manage their credit and pay on time.

• • Keep balances low on credit cards and other “revolving credits.”

• • Pay off the debt instead of transferring it.

• • Don’t close unused credit cards as a short-term strategy to improve your credit score. In fact, debting the same amount but having fewer accounts open can lower a person’s score.

• • Don’t open a new credit card just to increase your existing credit. This approach can backfire and lower a person’s credit score.

• • Do not open multiple new accounts in a row. New accounts will lower the average age of accounts, which will have a greater effect on a person’s score if they don’t have a lot of other credit history.

• • Re-establish a good credit history. Responsibly opening new accounts and paying on time will improve one’s score in the long run.

• • Checking a person’s credit report will not 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. .

• • Register and open new credit accounts only when necessary.

• • Have credit cards – but monitor and manage them responsibly.

• • Note that closing an account does not make it go away. Closed accounts will still appear on a credit report and can affect a person’s score.