What Are Credit-Based Auto Insurance Scores?

What Are Credit-Based Auto Insurance Scores?

Did you know that your credit information and your credit score may be used in determining if you can get automobile insurance and how much you will have to pay for that insurance? Many consumers are simply not aware of this practice, but it takes place everyday. This article examines some of the more common issues associated with this practice.

The first thing consumers should know is that there are state laws that govern the use and the collection of credit information. This article only examines the commonalities, not the specifics of each state.

To begin, you should know what an insurance score is. Your insurance score is a number that is calculated using the information on your credit report. Some insurance companies believe that credit information can be an indicator of future accidents or insurance claims.

It should be noted that each insurance company has its own means and methods for determining your insurance score as it pertains to their company. In other words, do not be surprised if various companies use various methods for coming up with their score.

Two factors that are commonly used in determining an insurance score are: Past insurance claims and past financial history as it relates to credit and loans.

In general terms, this information is used to determine how likely a person may be to have an accident or to file an insurance claim. Many companies use a value system whereby certain information is given a numeric value; those values are then added up and a resultant score is determined. In most cases, lower scores are more favorable than higher scores.

Insurance applicants should understand that credit scores and insurance scores are not one in the same. Credit scores are based on past credit history and the current ability of a consumer to repay a loan. Insurance scores calculate the probability of that same consumer having an automobile accident. This type of assessment is usually based on the past history of other people who have had the same type of credit history and the same type of insurance filing history.

The exact type of information that is used to determine your insurance score will vary from company to insurance company. Some may not use your past job history or your current income as factors, while others may decide to use that information.

Usually, good credit history that reflects on-time payments of bills as well as accounts that have long histories are favorable. Open accounts that are in good standing are also usually considered favorably. Also, not being maxed out on your credit is considered a favorable factor.

Some of the factors that may be unfavorable include collection actions, several late payments reported, high level of credit use, and numerous applications for credit.

Again, what an insurance company may use or not use is often determined by state law.

If you suspect that your insurance premiums are high because of a bad credit history you can try to improve your credit report findings by doing those things that are important. Paying bills on time and in full are two of the most important factors. You can work to bring down your current debt level which will help with your insurance score as well.