Alyssa Lane
In the US, auto insurance companies often use credit scores to help set insurance rates. While not all companies check credit scores, most do, and data suggests that drivers with poor credit file more claims, and these claims are more expensive for insurers. Credit scores are used to create a credit-based insurance score, which is used to predict the likelihood of a future accident or claim. This is supported by actuarial research, which shows a correlation between a driver's credit score and their likelihood of filing a claim. However, it's important to note that this practice is not allowed in all states. California, Hawaii, and Massachusetts prohibit or limit the use of credit scores in setting insurance rates.
| Characteristics | Values |
|---|---|
| Credit history considered | Yes, in most states |
| Credit-based insurance score | Used by most insurers to set rates |
| Credit score impact | Average difference of $1,500 per year between lowest and highest credit scores |
| Credit score influence | 92% of insurers consider credit scores when calculating premiums |
| Credit score range | Not always 300-850; score ranges vary |
| Credit check type | Soft inquiry |
| Credit history impact | Not the primary factor in insurance decisions |
| Credit history not considered | California, Hawaii, Massachusetts, Michigan |
What You'll Learn
Credit-based insurance scores
While each insurer has its own method for calculating credit-based insurance scores, the common goal is to assess the potential risk associated with offering coverage. A lower credit score may indicate increased risk, leading to higher insurance premiums. Conversely, individuals with excellent credit may benefit from lower rates, as their likelihood of filing claims is perceived to be lower.
It's important to note that credit-based insurance scores are not the sole factor in determining insurance rates. Other criteria, such as driving record, location, demographics, vehicle type, and insurance type, also play a significant role in the overall calculation. Additionally, certain states have laws prohibiting or limiting the use of credit information in car insurance pricing.
Improving one's credit-based insurance score can be achieved through timely bill payments, maintaining a low credit utilisation ratio, and minimising hard credit inquiries. These steps can positively impact an individual's financial health and potentially lead to more favourable insurance premiums.
In summary, credit-based insurance scores are a significant factor in the auto insurance industry, and understanding how these scores are calculated can help individuals optimise their insurance rates and make more informed financial decisions.
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Credit history length
The length of your credit history is a factor in determining your credit score. It accounts for 15% of your FICO score and approximately 21% of your VantageScore. The longer your credit history, the more positive the impact on your credit score.
The length of your credit history is calculated by taking the average age of all your credit accounts. This includes the age of your oldest account, the age of your newest account, and the average age of all your accounts. It also takes into account how long specific credit accounts have been open and how much time has passed since the accounts have been used.
A longer credit history indicates that you have a track record of managing your finances well. This can make lenders and credit card issuers more confident in lending to you. However, it's important to note that while credit history length is important, other factors such as payment history and credit utilization have a greater impact on your credit score.
If you're looking to improve your credit history length, it's recommended to keep your credit accounts in good standing and avoid closing credit cards unnecessarily. You can also become an authorized user on an old, established account with a primary cardholder who has excellent credit. This can help improve your score. Additionally, when opening new credit accounts, do so intentionally, as new accounts bring down the average age of your credit.
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Credit mix
Creditors and lenders assess the risk of lending money by evaluating an individual's ability to manage different types of credit. FICO examines both the mix of credit and the payment history of these credit types. For example, an individual with a mix of installment and revolving loans but a poor payment history will likely have a lower FICO score.
In the context of auto insurance, an individual's credit mix is one of the factors considered when determining their credit-based insurance score. This score is used by insurance companies to predict the likelihood of a future accident or claim. While credit mix is only a small part of the overall FICO score calculation, it can still impact an individual's ability to obtain credit and secure favourable insurance rates.
It is important to note that applying for multiple new credit lines within a short period can negatively impact an individual's credit score. Lenders may interpret this as a sign of financial distress. Therefore, it is generally not advisable to apply for new credit accounts solely for the purpose of improving one's credit mix.
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Payment history
Maintaining a positive payment history is essential for several reasons. Firstly, it indicates your ability to manage your finances effectively. When insurance companies review your credit history, they assess your payment history to predict the likelihood of future claims. A track record of on-time payments suggests that you are reliable and less likely to file frequent or costly claims. This, in turn, can lead to lower insurance premiums.
Conversely, a history of late or missed payments can negatively impact your credit score and increase your insurance rates. Late payments may result in debt collection reports, which can remain on your credit report for up to 7-10 years. These reports are visible to future lenders and can affect your ability to obtain loans, credit cards, or other financial products. Additionally, insurance companies may view late payments as an indicator of financial instability, potentially leading to higher premiums.
To improve your payment history, it is crucial to prioritize paying your bills on time. This includes not only your insurance premiums but also your credit card bills, loan payments, and other financial obligations. By consistently making timely payments, you can positively impact your credit score and maintain a favourable credit history.
It's worth noting that while payment history is a significant factor, it is not the sole determinant of your auto insurance rates. Insurance companies consider various other factors, including your driving record, age, gender, commute, and claims history. However, by focusing on maintaining a positive payment history, you can take a significant step towards achieving lower insurance premiums and improving your overall financial health.
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Credit scores in different states
Credit scores can vary significantly from state to state, and these differences can have a direct impact on financial matters such as insurance rates and premiums. While credit scores are not the sole factor in determining insurance rates, they play a significant role in the evaluation process.
In 2021, Minnesota had the highest average FICO score, with Vermont, Wisconsin, New Hampshire, Washington, and North Dakota close behind. These states generally have higher median incomes, better job opportunities, and lower unemployment rates, making it easier for residents to maintain financial stability and manage their debts.
On the other hand, Mississippi consistently ranks as the state with the lowest average credit score, followed by Louisiana, Alabama, Oklahoma, Texas, and Georgia. These states, mostly located in the Southern region of the US, tend to have lower median incomes and higher poverty rates, which may contribute to the lower credit scores.
It's worth noting that the use of credit scores in insurance decisions is not uniform across the country. States like California, Hawaii, Massachusetts, and Michigan have regulations prohibiting or limiting the use of credit scores in setting insurance premiums.
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Frequently asked questions
No, not all auto insurance companies base their rates on credit history. While most insurers use credit checks to create a credit-based insurance score to help set your rate, some insurers provide auto insurance with no credit check.
Historical data from the Federal Trade Commission shows that drivers with poor credit file more claims than drivers with excellent credit, and these claims are more costly for insurers. As a result, those with good credit often pay far less for insurance than those with a poor credit history. The difference in average auto insurance rates between the lowest and highest levels of credit is upward of $1,500 per year.
California, Hawaii, and Massachusetts outlaw the use of credit scores in setting auto insurance rates. Other states, including Texas and Colorado, have limits on how insurers can use these scores.
You can improve your credit-based insurance score by consistently paying your bills on time, minimising hard inquiries on your credit report, and maintaining long-standing credit accounts.
