Auto insurance companies rely on auto insurance scores to determine a customer’s insurance premium. While insurance companies used to rely on your accident and claim history to calculate your premium, they now also factor in data that has more to do with your credit and financial history than with your driving habits.
Looking to change your rates? Compare auto insurance quotes now by entering your zip code in the free box on this page!
The young man speeding by you in the cherry-red Mustang might be paying less on his insurance premium than you in your blue Volvo driving the exact legal speed. That’s because factors such as gender, age, driving habits and type of car don’t “count” as heavily as financial history in the way that your auto insurance score is determined.
How is an auto insurance score determined?
In order to determine your auto insurance score, an insurance company will pull your credit report in the same way that a bank will when you apply for a loan. Then, depending on the insurance company, they will apply some type of formula to your credit data. Many insurers rely on credit scoring algorithms created by ChoicePoint and Fair Isaac, two credit scoring companies. Others use their own in-house models to develop your auto insurance score.
Scoring and insurance companies keep their exact scoring methods to themselves, so there is no standard across the industry. Some may weigh one credit factor heavily, while another may focus instead on something else. In addition, different insurance standards vary from state to state, so insurance scores also have to be calculated to meet state benchmarks.
On its website, Progressive states that it analyzes both the accident/claim history and the credit report information of drivers it has already insured, in order to predict how likely any one customer is to have a future car accident or insurance claim.
This predictive model compares people with similar “credit characteristics” to those who have filed accident claims in the past and then assumes the same type of people will likely file a claim in the future. This likelihood is assigned a value, and then the values of all the factors are totaled to calculate your insurance score.
Why do insurance companies factor in credit scores?
Insurance companies didn’t think they had enough information on a customer to come up with a specific insurance plan when they were just utilizing factors such as age, zip code and marital status. Then, studies in the 1990s showed that credit scores could help predict if a homeowner or car owner would file an auto insurance claim in the future. Thus, credit scores became a major factor in determining any type of insurance policy, not just auto insurance.
Nobody knows for sure why there’s a correlation between having “good credit” and filing fewer claims and having “bad credit” and filing more, but it sounds right. People who handle their money and other financial matters in a responsible way are less likely to get into accidents or, at least, less likely to report those accidents.
Are people who are careless with their finances also careless on the road? The evidence points to this being true.
A problem exists in the actual calculations of the insurance score, since it varies from provider to provider, and most auto insurance companies view their model as proprietary information. In some cases, a driver with a clean record will pay more, not because of anything to do with his driving, but because he owns one too many credit cards, according to his provider’s scoring model.
How do I raise my insurance score?
It is difficult to change your auto insurance score because insurance companies base it on data gathered at a particular point in time. So you may work to increase your credit score but, if your auto insurance company requests your credit report the day before your score changes, your auto insurance premium will stay the same.
Still, it’s always worth the effort to improve your credit rating, and you can do this by establishing a good credit history over many years, paying off bills when they’re due, not carrying credit card balances from month to month, and making sure all credit card, bank and other financial accounts remain in good standing.
Try not to apply for too much credit in a short period of time, as this makes it appear that you’re having financial troubles, even if you’re just searching for a new credit card or bank account.
Even if you can’t check your auto insurance score, you can always make sure that you’re getting the best price possible on your premiums. Check your auto insurance quotes by entering your zip code in the box below.