Credit-based insurance scores significantly influence auto insurance premiums in most states, yet many drivers remain unaware of how these scores work or why insurers use them. Understanding the statistical relationship between credit data and insurance claims empowers you to make informed decisions about your coverage.
What Is a Credit-Based Insurance Score?
A credit-based insurance score differs from a traditional credit score, though both draw from similar data sources. While credit scores predict the likelihood of repaying debt, insurance scores predict the probability of filing insurance claims. The scoring models weight various credit factors differently based on their statistical correlation with claims frequency and severity.
Insurance scores typically range from 200 to 997, with higher scores indicating lower predicted risk. Most consumers fall between 500 and 800. Unlike credit scores, you cannot directly request your insurance score from scoring companies, though you can request your credit report and understand how its components affect your insurance rating.
The Statistical Foundation
Insurers use credit-based scores because decades of actuarial research demonstrates a statistically significant correlation between credit characteristics and insurance loss experience. Multiple peer-reviewed studies confirm that consumers with lower credit-based scores file claims more frequently and incur higher claim costs.
Key Research Findings
Industry studies reveal that drivers in the lowest credit score tier file claims 40% to 50% more frequently than those in the highest tier. The correlation persists even after controlling for other rating factors like age, gender, and driving history. This relationship holds across different demographic groups and geographic regions.
The correlation does not imply causation. Researchers theorize that the traits associated with responsible credit management, such as attention to detail and long-term planning, also manifest in safer driving behavior. Others suggest that financial stress may impair attention and decision-making on the road.
Factors That Influence Your Insurance Score
Credit-based insurance scores evaluate similar data points as traditional credit scores but apply different weights based on their predictive value for insurance losses.
Payment History
Your track record of paying bills on time carries substantial weight in insurance scoring. Late payments, particularly those 30 or more days overdue, negatively impact your score. The recency and frequency of late payments matter, as does the severity of delinquency.
Outstanding Debt
The amount you owe relative to your available credit influences your score. High credit utilization ratios, where you use most of your available credit, correlate with higher insurance risk. Maintaining lower balances relative to credit limits benefits your insurance score.
Length of Credit History
Longer credit histories generally produce better insurance scores, as they provide more data points for assessing your financial behavior patterns. The age of your oldest account and the average age of all accounts factor into the calculation.
Credit Mix and New Credit
Having various types of credit accounts, including installment accounts and revolving credit, can positively influence your score. However, opening multiple new accounts in a short period may signal financial stress and lower your score temporarily.
How Much Does It Affect Your Premium?
The impact of credit-based insurance scores varies significantly by insurer and state but can be substantial. Studies indicate that premium differences between the best and worst credit tiers can exceed 100% for some insurers. A driver with excellent credit might pay $1,200 annually while a driver with poor credit pays $2,500 or more for identical coverage.
The differential compounds with other rating factors. A young driver with poor credit faces multiplicative penalties that can make insurance prohibitively expensive. Conversely, an older driver with excellent credit benefits from favorable ratings across multiple factors.
State Regulations
State laws governing credit-based insurance scoring vary considerably. California, Hawaii, and Massachusetts prohibit the use of credit information in auto insurance pricing entirely. Maryland restricts its use to new policies only. Other states allow credit scoring but regulate how insurers can apply it.
Some states require insurers to re-score policyholders periodically and apply any improvements. Others mandate that insurers cannot use the absence of credit history as a negative factor. Understanding your state's regulations helps you know what to expect from your insurer.
Improving Your Insurance Score
Because insurance scores derive from credit data, improving your credit profile generally improves your insurance score. Focus on the factors that carry the most weight in insurance scoring.
Prioritize Payment Timing
Paying bills on time has the most significant positive impact on your insurance score. Set up automatic payments or reminders to ensure you never miss due dates. Even if you cannot pay the full balance, making at least the minimum payment on time protects your score.
Manage Credit Utilization
Keep credit card balances well below your limits. Aim for utilization below 30% on each card and across all accounts combined. If possible, pay balances in full each month. Requesting credit limit increases can help lower utilization ratios without changing spending.
Maintain Account Stability
Keep older accounts open even if you rarely use them, as they contribute to your credit history length. Avoid opening unnecessary new accounts. When you do apply for credit, concentrate applications within a short period to minimize the impact of credit inquiries.
Disputing Errors
Credit report errors can artificially lower your insurance score. Federal law entitles you to free annual credit reports from each major bureau. Review these reports carefully for inaccuracies such as accounts that are not yours, incorrect payment statuses, or outdated negative information that should have aged off.
If you find errors, dispute them directly with the credit bureau and the creditor reporting the information. Correcting inaccuracies can improve your insurance score and reduce your premiums.
The Ongoing Debate
Consumer advocates continue to debate the fairness of using credit data in insurance pricing. Critics argue that credit-based scoring penalizes consumers who face financial hardship through no fault of their own and may have disparate impacts on certain demographic groups. Proponents counter that the practice enables more accurate risk assessment and lower premiums for consumers with good credit.
Regardless of the debate's outcome, understanding how credit-based insurance scores work today helps you navigate the current system effectively and take actions that may reduce your premiums over time.