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.
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 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:
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 |
|
FICO |
700-900 |
250-500 |
|
LexisNexis |
776-997 |
200-500 |
|
TransUnion |
776-950 |
150-500 |
Source: WalletHub
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.
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.”
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:
