Understanding Auto Insurance Credit Ratings: What's A Good Score?

A good auto insurance credit rating can be the difference between a manageable insurance premium and a sky-high one. But what is a good auto insurance credit rating, and how is it calculated?

In the US, auto insurance companies use credit-based insurance scores to determine how likely a driver is to file a claim. These scores are calculated by data analytics companies like LexisNexis and FICO and are based on an individual's credit report. While the exact weighting of factors may differ, these typically include payment history, outstanding debt, credit history length, pursuit of new credit, and credit mix. A higher score generally indicates a lower risk of filing a claim and results in more favourable insurance rates.

It's worth noting that insurance credit scores are not the same as the more commonly known FICO or VantageScore credit scores. While they consider similar factors, they are weighted differently as they are designed to predict different outcomes: insurance credit scores assess the likelihood of filing an insurance claim, whereas credit scores estimate the likelihood of repaying a loan.

While there is no universal definition of a good insurance credit score, scores in the higher ranges are generally viewed more favourably. Scores above 770 are often considered good, with scores above 800 deemed excellent. However, insurance companies may have their own definitions of a good score, and this can vary between providers. Ultimately, improving your credit score is a vital step in obtaining the lowest possible rate for your auto insurance policy.

Credit-based insurance scores are different from typical credit scores

Firstly, credit-based insurance scores are designed to predict the likelihood of filing insurance claims that may cost the insurance company more than the premiums collected. In contrast, typical credit scores predict the likelihood of an individual falling behind on bill payments.

Secondly, the score ranges differ between the two types of scores. Most credit scores fall within the range of 300 to 850, while credit-based insurance scores may have a different range, such as the LexisNexis Attract score, which ranges from 200 to 997.

Thirdly, insurance companies cannot solely rely on credit-based insurance scores to make decisions. State laws generally prohibit insurance providers from declining applications, setting rates, or determining renewals based solely on these scores. In contrast, creditors can decline credit applications, close accounts, or reduce credit limits based on low credit scores.

Additionally, credit-based insurance scores and credit scores may use similar factors but weigh them differently. For example, FICO's credit-based insurance score weighs payment history at 40%, while outstanding debt accounts for 30%. In contrast, FICO's credit score gives more weight to credit utilisation than payment history.

Lastly, while it is easy to access credit scores and reports, it is challenging for consumers to obtain their credit-based insurance scores. These scores are generally not available to consumers and must be requested from insurance agents or companies that created the scores.

Credit-based insurance scores are calculated using factors like payment history, credit history length, credit mix, and pursuit of new credit

Credit-based insurance scores are calculated using a variety of factors, including payment history, credit history length, credit mix, and pursuit of new credit. These scores are used by car insurance companies to determine rates and are weighted differently than traditional credit scores. While the specific calculation methods vary among insurance companies, there are some common factors that are generally considered.

Payment history is a significant factor, with insurers looking at how well individuals have made payments on their outstanding debts. This includes the frequency of payments and the amount paid off. Outstanding debt is also taken into account, with a higher amount of debt potentially leading to a lower insurance score.

Credit history length is another important consideration. Insurers evaluate the length of time an individual has had an open line of credit. A longer credit history can contribute to a higher insurance score. Additionally, the pursuit of new credit is considered, with recent applications for new lines of credit potentially impacting the insurance score negatively.

The credit mix is also factored into the calculation. This includes different types of credit, such as credit cards, auto loans, and mortgage loans. A diverse credit mix can positively influence the insurance score.

It is important to note that personal information, such as race, income, occupation, and location, is not considered in credit-based insurance scores. These scores are specifically designed to assess an individual's creditworthiness and the likelihood of filing an insurance claim.

While there is no definitive definition of a "good" credit-based insurance score, scores in the higher ranges are generally viewed more favorably by insurers. Improving one's credit history, such as by making timely payments and maintaining a low credit utilization ratio, can positively impact these scores over time.

A good credit score can save you money on auto insurance

A good credit score can help you save money on auto insurance in several ways. Firstly, a higher credit score can lead to lower car insurance rates. Insurance companies often use credit-based insurance scores to assess the risk of insuring a driver and determine their premiums. These scores are based on factors such as payment history, outstanding debt, credit history length, and pursuit of new credit. A higher credit score indicates lower risk, resulting in more favourable insurance rates.

Additionally, a good credit score can help you qualify for better insurance plans. Insurance companies may offer more comprehensive coverage options to drivers with higher credit scores, as they are perceived as lower-risk individuals. This means that you can get more coverage for a similar price or even less when compared to someone with a lower credit score.

Furthermore, a strong credit score can make it easier to switch insurance providers. If you're unhappy with your current insurer, a good credit score can help you find more favourable rates and plans with other companies. Shopping around for insurance quotes does not affect your credit score, so you can explore various options without negative consequences.

Improving your credit score can also lead to long-term savings on auto insurance. By making timely bill payments, maintaining a low credit utilisation ratio, and keeping old lines of credit open, you can positively impact your insurance score over time. This, in turn, can help you qualify for lower insurance rates and save money in the long run.

It's important to note that the impact of a good credit score on auto insurance rates may vary depending on other factors, such as driving history, location, and insurance company-specific criteria. However, in most states, a higher credit score will generally result in more affordable auto insurance options.

Poor credit can increase your auto insurance rates more than a DUI

Poor credit can have a significant impact on auto insurance rates, and in some cases, it may even increase rates more than a DUI. While the specific impact varies depending on the state and insurance company, poor credit can lead to substantially higher insurance premiums.

In general, insurance companies view individuals with poor credit as higher-risk drivers. As a result, they may charge higher rates to offset the perceived risk of insuring these individuals. According to a Forbes Advisor analysis, drivers with poor credit pay an average of $1,180 more per year for car insurance compared to those with good credit, which equates to a 76% increase. Similarly, Bankrate's research indicates that drivers with excellent credit scores pay an average of $2,031 per year for full coverage, while those with poor credit may pay $4,366 or more, reflecting an 115% increase.

The impact of poor credit on insurance rates can be even more pronounced when compared to the effects of a DUI. While a DUI can result in an average rate increase of around 84%, poor credit can lead to even higher surges in insurance costs. For example, NerdWallet's 2023 rate analysis found that drivers with poor credit pay 61% more, on average, than those with good credit.

It's important to note that the specific definition of a "good" credit score can vary among insurance companies. Each company sets its own thresholds for different tiers of credit scores, and these thresholds influence the rates offered to customers. Additionally, insurance companies use credit-based insurance scores, which are calculated differently from traditional credit scores and are not accessible to consumers.

To improve their credit-based insurance scores, individuals should focus on maintaining a positive credit history. This includes paying bills on time, keeping credit card balances low, limiting hard credit inquiries, and regularly monitoring their credit score. By taking these steps, individuals can work towards achieving lower insurance rates, as better credit-based insurance scores often result in more favourable insurance premiums.

You can improve your credit-based insurance score by paying bills on time, minimising hard credit inquiries, and maintaining old lines of credit

Improving your credit-based insurance score can take time and dedication, but it is possible. Here are some ways you can improve your score:

Pay your bills on time

Paying your bills on time is a crucial factor in improving your credit-based insurance score. Late or missed payments can signal to insurers that you may be a higher-risk customer. By consistently paying your bills on or before their due dates, you can positively impact your credit score and insurance score.

Minimise hard credit inquiries

It is important to distinguish between hard and soft credit inquiries. Hard inquiries occur when you apply for a loan or credit card, while soft inquiries, such as insurance companies reviewing your credit during the quoting process, do not affect your credit score. Too many hard inquiries in a short period can negatively impact your score.

Maintain old lines of credit

Keeping long-standing credit accounts open can benefit your credit score. The length of your credit history is a significant factor, accounting for 15-20% of your score. Instead of closing old credit card accounts, consider using them occasionally and making timely payments to extend your credit history.

Other tips

• Monitor your credit score regularly to identify any errors or potential identity theft.
• Be mindful of your credit utilisation ratio. Aim to keep your credit card balances below 30% of your total credit limit.
• Diversify your credit by responsibly managing a mix of credit accounts, such as credit cards, loans, and mortgages.

Frequently asked questions