Understanding Auto Insurance Scores: X907 Explained

An auto insurance score is a rating used by insurance companies to estimate the probability of an individual filing an insurance claim. The score is based on an individual's credit history and is used to determine their insurance premium. A low auto insurance score will result in a higher premium, while a high score will result in a lower premium. Auto insurance scores typically range from 200 to 997, with scores of 770 or higher considered good. Factors that can influence an auto insurance score include payment history, current debt, length of credit history, and types of credit used. Improving an auto insurance score can be done by making timely payments, reducing debt, and maintaining a long credit history.

How is an auto insurance score calculated?

An auto insurance score is a rating used by insurance companies to estimate the risk of a driver filing a claim. The score is based on a driver's credit history and is used to determine the premiums they pay for their coverage. A low auto insurance score indicates a higher risk of filing a claim, resulting in higher insurance premiums. On the other hand, a high auto insurance score corresponds to a lower risk and leads to reduced insurance premiums.

Auto insurance scores are calculated using various factors related to an individual's credit history and financial behaviour. While the specific calculation methods may vary across different insurance companies and third-party vendors, here are some common factors that contribute to the calculation of auto insurance scores:

• Payment history or credit score: This includes the payments made on credit cards, mortgages, loans, and other financial obligations. Late payments or a history of defaults negatively impact the auto insurance score.
• Outstanding debt: The amount of debt an individual has can affect their score. A higher debt amount may indicate a higher risk, leading to a lower auto insurance score.
• Length of credit history: A longer credit history can contribute to a higher auto insurance score. This includes considering the age of the oldest account, the average age of all accounts, and the age of accounts by type.
• New lines of credit or pursuit of new credit: Opening multiple new credit accounts or frequently applying for new credit can negatively impact the score.
• Types of credit: The diversity of credit sources, such as credit cards, retail accounts, mortgages, and loans, is also considered.
• Credit utilization: Maintaining a low credit utilisation ratio, or using less of the available credit, is generally favourable for achieving a higher auto insurance score.

It is important to note that auto insurance scores are distinct from traditional credit scores. While credit scores focus on an individual's creditworthiness and ability to repay debts, auto insurance scores specifically assess the risk of filing insurance claims. Additionally, factors such as race, ethnicity, gender, location, employment history, and age do not influence auto insurance scores but may still impact insurance premiums.

How does it differ from a credit score?

An auto insurance score is a rating computed and used by insurance companies to determine the probability of an individual filing an insurance claim while under coverage. While it is calculated using much of the same data as a credit score, there are some key differences.

An auto insurance score is a credit-based score, but it is not the same as a credit score. An auto insurance score is used specifically to predict the likelihood of a driver having an accident or making a claim, whereas a credit score is a broader indicator of an individual's ability to manage their finances.

The factors that affect your credit score are all related to your borrowing history and current debt situation. These include payment history, length of credit history, credit mix, and pursuit of new credit. While these factors are also considered by insurers when calculating an auto insurance score, they are weighted differently. For example, 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's worth noting that auto insurance scores are not available for consumers to see, and there is no standard range for these scores. The actual number varies depending on the agency providing the data.

In addition, while a credit score is calculated using information from your credit report, an auto insurance score also takes into account other factors outside of your credit history, such as your driving record, the type of car you drive, and where you live.

Furthermore, while a good credit score typically indicates a higher likelihood of financial responsibility, a good auto insurance score indicates a lower risk of filing a claim. So, while a high credit score generally leads to more favourable loan terms, a high auto insurance score can result in lower insurance premiums.

How does it impact insurance premiums?

An auto insurance score is a rating computed and used by insurance companies to determine the probability of an individual filing an insurance claim while under coverage. The score is based on the individual’s credit rating and will affect the premiums they pay for the coverage.

Actuarial studies suggest that how people manage their finances is a good indicator of how likely they are to file an insurance claim. An individual's credit history is used to compute their insurance score. This includes their current level of debt, length of credit history, credit mix, payment history, and pursuit of new credit.

A low insurance score can be costly, especially for auto insurance coverage, which is legally required for car drivers in most states in America. A low insurance score will result in higher insurance premiums. For example, if an individual’s insurance score causes their auto insurance premium to increase by $25 per month, they will pay approximately $300 more in premiums per year. In four years, the premium difference will be $1,200. Over 10 years, it will cost them $3,000, an amount that could be invested or spent in other ways.

While most insurance companies have a similar process for computing consumers' insurance scores, auto insurance companies have different standards for what they consider a good score. Some may offer lower premiums for scores in the 800-range, while others will only require scores in the 700-range to qualify for certain discounts.

Certain states have banned the use of credit when calculating insurance rates, including California, Hawaii, Washington, Massachusetts, and Michigan. In these states, an individual's credit score will not affect their insurance rates, regardless of how good or bad it is.

How can you improve your auto insurance score?

Auto insurance scores are ratings based on information from credit reports that insurers use to estimate how likely drivers are to file a claim. A good auto insurance score can benefit your insurance rate, while a bad one could mean you’re paying more each month. Here are some ways to improve your auto insurance score:

Check Your Credit Report

Get a credit report to understand your current credit score and where you can improve. You can pull your credit report once a year for free from each of the three main reporting bureaus: Equifax, Experian, and TransUnion. When reviewing your credit report, make sure all the information is correct. Look for any discrepancies, such as a late payment fault or unexpected penalties. Reviewing your credit report provides a good basis for understanding your credit score and areas for improvement.

Pay Bills on Time

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

Avoid Opening Too Many Credit Accounts at Once

Opening multiple credit accounts simultaneously can be a red flag for insurance scores. While sign-up bonuses may be tempting, opening several credit cards within a short timeframe can make you appear as a risky borrower, negatively affecting your insurance score.

Keep Accounts Open

Keeping credit accounts open for an extended period demonstrates stability and financial responsibility. If you have no credit history, consider opening a new account and building a positive history over time. As long as you manage the account well and make timely payments, it will reflect positively on your insurance score.

Keep Outstanding Balances Low

Using some credit is beneficial for your auto insurance score. Aim to utilise 20-30% of your available credit. Exceeding this range may indicate a lack of financial balance and affordability. Staying within the 20-30% sweet spot demonstrates wise credit usage and positively influences your score.

Improve Your Credit Score

Since auto insurance scores are heavily influenced by credit scores, taking steps to enhance your credit score will have a positive impact. This includes paying bills on time, maintaining a low credit utilisation ratio, and ensuring numerous accounts are in good standing.

Be Financially Responsible

Being financially responsible involves making wise choices with your credit. This includes limiting the number of credit accounts and credit cards in your name and avoiding excessive loan and credit card applications, as these can negatively impact your credit score.

Build a Long Credit History

A lengthy credit history is favourable for your auto insurance score. Keep your oldest credit accounts open to showcase a well-established track record. This demonstrates stability and financial trustworthiness.

Which states prohibit the use of auto insurance scores?

Auto insurance scores are numerical scores used to predict the likelihood of an individual filing an insurance claim while under coverage. While most states in the US allow insurance companies to use credit-based insurance scores to determine insurance rates, there are some states that prohibit this practice.

California, for instance, does not allow insurance companies to use credit-based scores or an individual's credit history for underwriting or rating auto policies, or for setting rates for homeowners insurance. Hawaii also bans auto insurers from using credit ratings when setting standards, including underwriting standards and rating plans, which determine insurance premiums. However, credit can impact homeowners insurance in the state.

In Maryland, auto insurers can use an individual's credit history to help determine the rate on a new policy, but they cannot use it to deny the initial application, cancel a policy, refuse to renew a policy, or increase premiums during a renewal.

Massachusetts law forbids auto insurance companies from using credit information or credit-based insurance scores when underwriting a new policy, setting rates, or renewing an auto policy. Michigan also prohibits insurance companies from using an individual's credit or a credit-based insurance score as part of their decision-making process to deny, cancel, or refuse to renew an auto or homeowners policy. Additionally, auto insurers in Michigan cannot use an individual's credit score to determine their rates.

Oregon and Utah have similar restrictions, with insurers in these states unable to cancel or refuse to renew a policy because of an individual's credit. However, they can consider an individual's credit when deciding whether to initially offer a policy.

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