How do my insurance scores affect my car insurance rates?

A couple drive a car after learning how insurance scores affect car insurance ratesImage: A couple drive a car after learning how insurance scores affect car insurance rates

In a Nutshell

Credit-based insurance scores aren’t something you hear about every day, but they are important. In fact, these scores, alongside other factors, can substantially affect your auto insurance rate.
Editorial Note: Intuit Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors’ opinions. Our third-party advertisers don’t review, approve or endorse our editorial content. Information about financial products not offered on Credit Karma is collected independently. Our content is accurate to the best of our knowledge when posted.

Your credit-based auto insurance scores affect your auto insurance rate much like you’d expect your credit scores to affect your interest rate on a new loan.

Insurance scores affect your auto insurance rate in a fairly predictable manner. The better your insurance scores are, the lower your auto insurance rate will typically be. On the other hand, if your insurance scores aren’t doing well, your auto insurance rate will likely be higher. And heads-up: Insurance companies can vary in their use of “low score” and “high score” to refer to positive scoring.

Of course, credit-based insurance scores are only one of many factors that determine the rates you might be offered and only if insurance companies are allowed to use them. In some states, insurers aren’t allowed to use credit information to determine rates.

How do insurance companies use my auto insurance score?

Insurance companies use your credit-based auto insurance score as one of many factors to determine the premiums they charge. In addition to insurance scores, insurance companies usually consider factors like …

  • ZIP code
  • Age, make and model of your vehicle
  • Miles driven per year
  • Driving history
  • Age or driving experience
  • Accident or claims history

When insurance scores are combined with other factors, insurance companies are able to better determine the likelihood of insurance losses. That’s important because insurance companies are in business to make money, which means they need to make sure they can cover future losses and their expenses, and still be able to turn a profit. Based on all of the information at their disposal, including your credit-based insurance score, insurance companies then set premiums for your auto insurance policy.

Insurance score factors

The exact factors that influence your insurance score can vary from company to company. But all insurance companies are trying to determine risk, so the factors are likely similar. They may disregard some credit details that have no impact on insurance risk, or they may factor in some of the same credit information but at different degrees.

The credit-scoring company FICO offers a credit-based FICO insurance score used by some insurance companies. It’s made up of the following major credit categories:

  • Payment history (roughly 40%)
  • Total debt (roughly 30%)
  • Length of credit history (roughly 15%)
  • Pursuit of new credit (roughly 10%)
  • Mix of credit (roughly 5%)

Other insurance companies use their own credit-based insurance scoring formula. For instance, on its site Progressive gives examples of favorable and unfavorable credit factors that could affect your insurance score.

It’s important to note that there’s some information that isn’t included when calculating your credit-based insurance score. This can include info like the following:

  • Sex
  • Marital status
  • Age
  • Ethnicity
  • Address
  • Income

And while personal information like this might be considered part of the auto insurance pricing decision, it’s not factored into your insurance score.

What factors hurt my credit-based auto insurance score?

While credit scores and insurance scores are calculated in different ways, many of the same negative activities can hurt both. The difference is that the actions may affect your credit scores and insurance score in slightly different ways or by differing degrees of severity.

Progressive lists the following examples of credit factors that could hurt your Progressive insurance score:

  • Making late payments
  • Using a high amount of your available credit
  • Applying for many new credit accounts
  • Having accounts in collection

What can I do to improve my credit-based auto insurance score?

Improving your auto insurance score could help you find lower insurance rates, all other factors held equal. Ultimately, it comes down to practicing good credit health habits. For example, here are some of the habits that could help your Progressive insurance score:

  • Having open accounts in good standing
  • Building a long credit history
  • Keeping your credit utilization low
  • Having no missed or late payments

Some companies may be willing to overlook some of your negative credit information in extreme circumstances. For example, Nationwide states that it may reconsider your premiums if your credit has been directly affected by certain events, such as divorce, serious illness, death of a relative or other circumstances. Contact your insurance company to see if it has a program that could help improve your premiums if you’re in a similar position.

Next steps

Now that you’re aware of the ways you can positively and negatively affect your credit-based insurance scores, use that knowledge to work toward improving your scores. You can learn more about how to build good credit health overall in our comprehensive guide.

Don’t forget that your credit-based insurance score isn’t the only factor affecting your insurance rates. Learn more about other ways car insurance rates are determined to work toward lowering your premiums even more.

About the author: Lance Cothern is a freelance writer specializing in personal finance. His work has appeared on Business Insider, USA and his website, Lance holds a Bachelor of Business Administration in … Read more.