Understanding Auto Insurance Scores With Credit Karma

Credit Karma provides a service where you can check your auto insurance score, which is a numerical score used to predict the likelihood that you will be involved in an accident or make a claim. This score is calculated using information from your credit reports and can influence the rate you pay for car insurance. The score typically ranges from 200 to 997, with a good score considered to be 770 or higher. Credit Karma provides this service for free, allowing you to monitor your auto insurance score and take steps to improve it if needed.

How is an auto insurance score calculated?

Auto insurance scores are numerical scores used to predict the likelihood that an individual will have an accident or make a claim. They are calculated using information from credit reports and can influence the premium rate for car insurance. The better the insurance score, the lower the auto insurance rate will typically be.

Credit-based insurance scores are one of many factors that determine the rates offered by insurance companies. These scores are calculated using information from an individual's credit history, including payment history, total debt, length of credit history, pursuit of new credit, and mix of credit. For example, the credit-scoring company FICO weighs the following factors to determine its auto insurance scores:

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

It is important to note that insurance companies may use different methodologies to interpret credit information and calculate insurance scores. Additionally, some states in the US, such as California, Hawaii, Maryland, Massachusetts, and Michigan, have banned the use of credit information in calculating insurance rates.

While auto insurance scores are calculated based on information in credit reports, they are not directly tied to credit scores. However, data shows a correlation between credit scores and auto insurance rates. Individuals with higher credit scores tend to have lower insurance premiums, as they are considered less risky in terms of making claims.

To improve auto insurance scores, individuals should aim for healthy credit habits, such as making timely debt payments, keeping credit utilization low, and maintaining numerous accounts in good standing.

How does it affect insurance rates?

An auto insurance score is a credit-based score that insurers use to determine the likelihood of a claim being filed. This, in turn, helps them set insurance rates. The better your insurance score, the lower your insurance rate will be. Conversely, a lower insurance score will result in higher insurance rates.

Auto insurance scores are calculated using information from your credit reports, including payment history, outstanding debt, length of credit history, pursuit of new credit, and credit mix. These scores are then used by insurers to determine the premiums they charge.

While auto insurance scores are not the only factor influencing insurance rates, they do play a significant role. In most states, insurers are allowed to use credit information to determine rates, and studies have shown that there is a correlation between credit behaviour and the likelihood of filing an insurance claim. As a result, individuals with higher credit scores tend to be offered better insurance rates.

It is important to note that not all states allow the use of credit information in setting insurance rates. For example, California, Hawaii, Massachusetts, and Michigan have banned the use of credit history in determining insurance rates. In these states, insurance rates are based solely on driving records, location, and other characteristics.

What is a FICO Auto Score?

A FICO auto score is a credit score that lenders use to determine a borrower's creditworthiness for auto loans. It is one of several credit scores created by FICO, the leading company in that field. Your FICO auto score is a three-digit number, ranging from 250 to 900, and the higher your score, the more likely you are to qualify for a loan with a good interest rate and other terms.

A basic FICO score measures how reliable you are at paying back debts. An auto loan FICO score specifically measures your ability to pay back auto loans. The basic FICO and auto loan FICO scores use different credit scoring models. The base FICO score ranges from 300 to 850, but FICO auto scores range from 250 to 900.

The FICO auto score that lenders look at is measured using the 9 XT version of the auto score measurement. This version is designed to take into account the past 30 months of credit behaviour using data from TransUnion's CreditVision system.

Five major factors contribute to this version of the FICO auto score:

• Credit utilisation rate
• Length of credit history
• Credit history
• Payment behaviour
• Auto-loan-specific risk behaviour

FICO auto scores are industry-specific credit scores. They are calculated using the same data as base FICO scores but weight it differently. For that reason, your base FICO score may be different from your FICO auto score.

There are several versions of FICO scores used in auto lending, depending on which credit bureau supplied the data. They include FICO Auto Score 2, 4, 5, 8, 9, and 10.

FICO auto scores are grouped similarly to base FICO scores in terms of credit quality. The credit bureau Experian breaks base scores down this way:

• 740 to 799: Very good
• 800 to 850: Exceptional

Lenders may also classify scores in these terms:

• 500 or less: Deep subprime
• 501 to 600: Subprime
• 601 to 660: Nonprime
• 781 to 850: Super prime

FICO auto scores and base FICO scores use the same information from individuals' credit reports but, as mentioned, the auto score model applies different weightings. For example, your history of auto loan payments will matter more in the calculation of your FICO auto score.

When you need a loan to buy a car, your FICO auto score will be an important factor that many lenders consider. Lenders typically prefer borrowers with a credit score of 661 or higher. In addition to qualifying you for a loan, your FICO auto score can influence the interest rates that lenders offer you. A higher credit score will usually translate into a lower interest rate.

How to improve your auto insurance score

An auto insurance score is a number used by insurance providers to determine your car insurance rate. It takes into account your financial history and predicts the likelihood of you filing a claim. A good auto insurance score can benefit your insurance rate, while a bad one can mean higher monthly payments.

Check Your Credit Report

Start by pulling your credit report from the three main reporting bureaus: Equifax, Experian, and TransUnion. You can do this for free once a year. Review the information and check for any discrepancies or errors. This will give you a baseline to work from and help you identify areas for improvement.

Make Timely Payments

Paying your bills on time is crucial for improving your credit score and, by extension, your auto insurance score. Set reminders or use sticky notes to ensure you never miss a payment deadline. This simple step can significantly impact your insurance score.

Avoid Opening Too Many Credit Accounts

Opening multiple credit accounts simultaneously can be a red flag for insurance scores. It may portray you as a risky borrower. Instead, open new accounts gradually and maintain a good standing to build a positive credit history.

Keep Accounts Open

Keeping credit accounts open for an extended period demonstrates stability and financial responsibility. If you have no credit history, open a new account occasionally and build a solid track record by making timely payments and maintaining a good standing.

Maintain Low Outstanding Balances

Aim to keep your credit utilization ratio low. Ideally, you should use only 20-30% of your available credit. Using more than this may indicate that you are struggling to manage your finances, which can negatively impact your insurance score.

Additionally, it's important to avoid late payments, collections, and a high number of new credit applications, as these can all lower your insurance score. Improving your auto insurance score may take time, but by following these tips and maintaining healthy credit habits, you can work towards lower insurance premiums.

How does it differ from a credit score?

An auto insurance score is a credit-based insurance score that is used to determine how likely you are to file a claim. It is designed to help insurance companies assess the risk of insuring you as a consumer. The better your insurance scores are, the lower your auto insurance rate will typically be. On the other hand, if your insurance scores are poor, your auto insurance rate will likely be higher.

While auto insurance scores are calculated from information on your credit reports, they are not the same as credit scores. Credit scores are meant to estimate the likelihood that you will pay off your debts, whereas credit-based insurance scores look at how likely you are to file an insurance claim.

• Weighting of Factors: While the factors used to determine both scores may be similar, they are weighted differently. For instance, according to FICO, the following is the weighting for a credit-based insurance score:
• Payment history (roughly 40%)
• Outstanding debt (roughly 30%)
• Length of credit history (roughly 15%)
• Pursuit of new credit (roughly 10%)
• Mix of credit experience (roughly 5%)

This differs from a typical credit score, such as a FICO score, which weighs factors differently.

• Purpose: The purpose of an auto insurance score is to predict the likelihood of an individual filing an insurance claim. On the other hand, a credit score is used to assess an individual's creditworthiness, or the likelihood that they will repay their debts.
• Impact on Insurance Rates: Auto insurance scores directly impact the insurance rates offered to individuals. A good auto insurance score can lead to lower insurance rates, while a poor score can result in higher rates. Credit scores, on the other hand, do not directly impact insurance rates but can influence an individual's overall financial health, which may indirectly affect insurance rates.
• Availability: Auto insurance scores are typically not available to consumers, whereas credit scores can be easily accessed and monitored by individuals. This lack of transparency around auto insurance scores makes it challenging for consumers to understand how insurers are assessing their risk.
• Calculation: Auto insurance scores are calculated using proprietary formulas developed by insurance companies, and these formulas can vary across companies. Credit scores, on the other hand, are calculated using standardized formulas developed by credit bureaus or financial institutions, such as FICO or VantageScore.

Frequently asked questions