June 28 is National Insurance Awareness Day. Are you aware of all the factors influencing the costs of your insurance? For example, does your credit score affect your car insurance rates? If you live in California, Massachusetts, or Hawaii, the answer is no. For residents of all the other states, the answer is yes, thanks to the concept of credit-based insurance scoring.
Auto insurers use certain information from your credit report to assess how likely you are to file a claim. The concept dates back to the mid-1990s, when auto insurers began researching whether FICO credit scores correlated with higher levels of claims. During the 2000s, separate studies at the University of Texas and the Federal Trade Commission (FTC) confirmed a statistical correlation between credit scores and costs to insurance companies.
Unfortunately, you can't use your standard credit score to assess the effect on your rate. Auto insurers develop their own score based on specific information from your credit report, and the information used may vary by company. The process may be outsourced — for example, Esurance uses LexisNexis to cull information from your report and determine a credit-based insurance score.
Chief Financial Analyst for Bankrate.com Greg McBride sums it up succinctly: "They're looking for ways to evaluate your risk, and creditworthiness is one of those metrics." Credit-based insurance scores are simply a variation on that theme.
The savings on auto insurance from superior credit can be significant, reaching thousands of dollars per year in certain states. In 2015, Consumer Reports used an interactive color-coded map to illustrate the amount of extra costs passed on to consumers with poorer credit scores by state. The results are sobering, and it's likely that the differences haven't improved since then.
You may be able to obtain a copy of your credit-based insurance score through your insurer, but the insurer is not obligated to give you details on how the score is created. Your best strategy to improve your credit-based insurance score is to take steps to raise your overall credit score and expect the insurance score to follow. Learn more about what makes up a credit score and how to raise your credit score in our new free eBook, Give Yourself Credit.
Start by assessing your credit report. Acquire a copy of your report from each of the three major credit bureaus (Experian, Equifax, and TransUnion) and review it for errors. Credit Manager can provide you with your three credit reports from Experian, TransUnion, and Equifax within minutes. Address any errors that you find through the bureaus.
Next, make sure that you continue to make all payments on time and manage your credit wisely. Keep balances flat or decreasing. Be reluctant to take on new debt and/or open new lines of credit. Aim to keep your overall credit utilization (the amount of available credit relative to the amount you use) as low as possible. Credit utilization below 20% is a reasonable goal. Over time, your credit score should increase and bring you better rate offers on everything from credit cards to loans to insurance.
You may think that simply paying your bills in full and on time is enough to earn a stellar credit score, but creditors need to see more. Gerri Detweiler, Head of Market Education for Nav, relates the story of her father, who is very responsible and reliable with money. He was notified by his insurance agency that he didn't qualify for the best insurance rate because he used so little credit that his current risk was poorly defined. Says Detweiler, "Credit is a tool, and building your credit history can help you not only get better deals when you borrow but also on things like auto and home insurance, or other places that will check your credit."
Keep in mind that a good credit-based insurance score does not guarantee a good auto insurance rate. There are many factors that can raise your rate, ranging from the type of car you drive and your current driving habits to your past driving history and whether or not you add high-risk drivers (such as teenagers) to your insurance policy. Remember this when you see the rate increase from adding your son or daughter to your policy, and remind yourself: if you hadn't improved your credit score, your rates could be a lot worse.
You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.