How Credit-based Insurance Scores Work


Your credit score means a lot to your car insurance company—guest writer Nick Clements explains why.

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Editor’s Note: This piece was written for Quoted by Nick Clements, Co-Founder of MagnifyMoney.com, a price comparison website that helps people get out of debt faster and earn the most on their savings. Nick spent nearly 15 years working in banking. Most recently he ran the UK consumer credit card business of Barclays. Nick graduated from Stanford University and when he isn’t saving people money, he is busy rescuing dogs with his wife.

Credit scores seem to dominate our lives. A good score can help you get approved for a low interest rate on a mortgage, auto loan or credit card. A bad score can make your life much more expensive. But most people don’t realize that a credit score can have a big impact on how much you will end up paying for auto insurance. Credit-based insurance scores are used by hundreds of insurance companies across the country. The only exceptions are Massachusetts, California and Hawaii, where the practice has been banned by lawmakers.

In this post, I will explain:

  • Why credit-based insurance scores are used
  • How to make sure you get the best score
  • How to make sure the information used in your score is correct
  • Why this isn’t always fair, or right

Why Credit-Based Insurance Scores Are Used

Data has shown that people who behave responsibly with credit tend to behave responsibly in other parts of their lives. Another way to say this: if you are reckless with your money, you are likely to be a reckless driver as well. Because the use of credit-scores is so controversial, there have been many studies challenging this correlation, and they have failed to do so.

Credit scores dominate our lives—and our car insurance rates.

Imagine someone you know who creates a monthly budget and sticks to it. That person probably pays her bills on time and saves for retirement. She is also highly likely to avoid speeding and always comes to a complete stop at intersections. This is not universally true. There are always exceptions. But it is overwhelmingly true. A study by the Texas Department of Insurance showed that the average loss per vehicle for people with the worst insurance is double that of people with the best credit-based insurance scores.

But credit-based scores are not used in isolation. In addition to information from credit bureaus, auto insurance companies will also look at previous claim experience using a report like the C.L.U.E. report. This report will provide seven years of insurance losses associated with an individual.

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A single, universal auto insurance score does not exist. There are many generic scores that have been built by companies like FICO. However, most large auto insurance companies will build their own scores, using historic claims and loss information. The insurance companies have teams of statisticians who look for correlations. For example, they might discover that someone who was 60 days or more delinquent on a credit card at the time of auto insurance application was much more likely to suffer an accident. As a result, the company would charge a higher premium for customers with that profile.

A single, universal auto insurance score does not exist.

The techniques used by banks and insurance companies are very similar. I spent my career in banking, and I often hired people from insurance companies to work in my credit card businesses to build decision models.

Nick Clements, co-founder of MagnifyMoney.com
Nick Clements, co-founder of MagnifyMoney.com

How To Make Sure You Get The Best Score

Although credit scores can vary by model type, they do reward certain similar types of behaviors. To have the best scores, you need to:

  • Pay your bills on time, every month. Even a single missed payment is usually punished severely.
  • Keep your credit card balances low. You should keep the balances low in absolute terms and relative to your credit limit. A good rule is to make sure your statement balances are never more than 20 percent of your available credit.
  • Have a long credit history.
  • Have no judgments or collection items reported on your credit report.
  • Avoid applying for a lot of credit cards or other financial products.

If you follow those tips, you should have an excellent credit score and low auto insurance premiums.

Keep your credit card balances low.

There are multiple ways to get a good estimate of your credit score:

FICO makes its score available for free on many credit card statements (like Citi, Discover and Barclaycard). In addition, you can get your credit score for free at sites like CreditKarma, which also provides a generic auto insurance score for free. Ideally, you should target a score above 750. But you should see very good rates (both from banks and auto insurance companies) if your score is above 700.

If you have a bad score

You should put together a plan to improve it. Bring your accounts current. Pay down your active credit card debt. And consistently pay on time every month. Over time, scores will improve with good behavior. And most negative items disappear in seven years, and become a lot less important in just a few years. You can find the six most important steps to a better score here.

How To Make Sure The Information In Your Credit Report Is Correct

You should obtain a free copy of your credit report from all three agencies at least once a year. You can do that for free at www.annualcreditreport.com, the only official website to receive your government-mandated free report. If you find inaccurate information, you should immediately dispute with the credit reporting agency right away. You can do that online at these links:

If you have any difficulties with the credit reporting agencies, you should not be afraid to complain directly to the Consumer Financial Protection Bureau. You can submit your complaint online.

You also have a right to see what information is in your C.L.U.E. report, which has a record of your accident and insurance loss history. You can order a free annual copy here.

This Isn’t Always Fair

Auto insurance regulators and companies point regularly to the strong correlation between credit history and auto claims. The correlation is indeed there. However, all scoring models have false positive ratios. That means the model identifies you as a high risk driver, when in fact you are not high risk at all. Because auto insurance is generally mandatory, people can end up paying more for insurance than their actual driving record would indicate is fair.

In addition, there are some real issues with credit scoring models. For example:

  • Medical debt affects one in five consumers. Given the incredibly complex health insurance and billing process, many people end up with collection items on their credit reports due to complicated billing processes and delayed reimbursement rather than real credit risk.
  • If you want to shop for a better interest rate, you have to shop around for credit. In many products, shopping for credit leaves a credit inquiry. Depending upon the model used, you could be a responsible consumer looking for a low interest rate. Instead, you are getting punished because of the number of credit inquiries.

There are many auto insurance companies out there, and most of them have their own models. To get the best premium, you should comparison shop using a website like The Zebra. You could get very different quotes from different providers, so it pays to shop.