Many insurers — at least in states where the practice is not banned — use what are known as credit-based insurance scores to determine how likely you are to file a claim.
The higher your credit-based insurance score, the more likely you are to qualify for a lower auto insurance premium.
What makes up these scores?
- Your payment history is the biggest factor. Your credit-based insurance score is based largely on whether you make certain monthly payments — your mortgage, student, auto and personal loan payments, and your minimum monthly credit card payments — on time. If you make these payments on time each month, the odds are higher that your credit-based insurance score will be higher.
- How much debt you owe and how much of your available credit you are using influence your score. The age of your credit plays a role too. Older credit accounts that you’ve routinely paid on time will exert a positive impact on your score.
- Your credit mix. Your score will be stronger if you also have a wider mix of credit — a mix that includes both revolving debt, such as credit card debt, and installment debt, such as mortgage or auto loans. Finally, if you’ve applied for too much new credit over a short period, that could drag your credit-based insurance score down.
What is a good credit-based insurance score?
Credit-based insurance scores have differing ranges, depending on which company the insurer is using. TransUnion offers a credit-based insurance score that ranges from 300 to 900, while one of the scores provided by LexisNexis ranges from 200 to 997.
The higher your score, the more likely you are to qualify for an auto insurance policy with a lower premium.
Why do credit scores matter?
But why do auto insurers rely on credit scores at all when determining your premium? What does your history of paying — or not paying — your bills on time have to do with how likely you are to get in an accident?
You might be surprised to learn that credit-based insurance scores are a good predictor of how likely drivers are to file a claim. Insurers have found that motorists with higher credit scores are less likely to file a claim. This makes them less of a risk to insure. Auto insurance companies reward this by assigning them lower premiums.
Want to boost your credit-based insurance score?
Pay your bills on time each month and pay off as much of your debt, especially credit card debt, as you can. Don’t open several new credit card accounts or take out multiple loans in a short period.
By following these rules, you’ll boost your odds of building a higher credit-based insurance score. And that could save you a significant amount of money in the long term.
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