What determines how much you pay for car insurance? Your driving record? Yes. Claims history? Yep. The neighborhood? For sure.
Credit report? Yes. Wait. What?
It’s true. Credit history plays a significant role in determining into how much we pay for auto insurance. The reason: experience shows that people with lower credit scores will file more claims than those with better credit histories, who tend to drive more responsibly.
So, it turns out there’s a thing called an auto insurance credit score that insurance companies assign to every applicant. These numbers are usually generated the Fair Isaac Corporation (the FICO people) or another credit bureau called ChoicePoint. The car insurance score works much like the FICO credit evaluation system with applicants assigned a ratings number based on a variety of factors. The Fair Isaac scale runs from 300 to 900, with 700 and above considered a good score and 800-plus top-shelf. ChoicePoint runs from 300 to 997, with 770-pplus considered a good risk.
Your insurance score is based largely on your credit score (mostly bill payment history and past-due accounts) with your insurance claims history and driving record also weighting the scale.
It is possible to be denied insurance based on your credit, but that practice is illegal in some states, including California, Massachusetts and Hawaii. The insurance score is more often used to quotes rates and offer discounts to lower-risk applicants. The premiums paid based on one’s credit score can vary widely. A recent study showed that people with poor credit pay 91% more for car insurance than those with excellent scores.
Even if your insurance score isn’t poor, it’s worth trying to improve that number. If you can quality for a discount that reduces your premium just $15 per month, you’ll save $180 a year on insurance.
Insurers use a similar scoring system for home insurance applicants, so your savings may compound if you own a house.
It’s not hard to improve your insurance score. It just takes time and discipline. First, drive more attentively to avoid those costly run-ins with Johnny Law. Avoid filing fender-bender level insurance claims if you can cover the damage out of pocket. Irritating, for sure, but the long-term savings are worth eating a modest repair bill.
Next, improve your credit score. Get a copy of your credit report – it’s free -- and make sure everything is correct; that there are no undeserved black marks. Clean up any legitimate issues, and then focus on paying down your consumer debt and paying your bills on time.
As your FICO number slowly rises, so will the benefits of having a strong credit score, including lower insurance premiums, better rates on loans, including a mortgage, easier apartment rentals, and, in some cases, a leg-up when applying for a job.
Get that credit report today!