What you pay for car insurance depends on more than just where you live, how old you are and whether you have a clean driving record or not. It also depends heavily on your credit. Most car insurers use parts of your FICO (Fair Issac Corp) credit score as a factor in determining what premiums to charge, except in California, Hawaii or Massachusetts where it’s illegal to do so.
FICO Credit Scores
First let’s looks at the different groups of the FICO score according to Experian.
- 800-850 = Excellent. 19.9% of people fall into this category.
- 740 to 799 = Very Good. 18.2% of people fall into this category.
- 670 to 739 = Good. 21.5% fall into this category.
- 580 to 669 = Fair. 20.2% of people fall into this category.
- 300-579 = Poor. 17% of people fall into this category.
According to FICO, in September 2018 the average U.S. FICO Score hit 704. It’s highest ever.
Note that in early 2019, FICO will introduce an UltraFICO score. Unlike the current scoring system, it will allow insurers to look into your bank account to see how you manage your money. The UltraFICO score could in some cases be better than a FICO score, depending on how you manage your bank account. And that’s the idea. Lenders ultimately want to use the UltraFICO score to boost the number lending approvals.
Credit-Based Insurance Scores
So do car insurers use your credit score? Yes. A 2018 study from Wallethub found that five major insurance companies – State Farm, Geico, Farmers, AllState and Progressive – used credit data in 81% of the states they operate in, on average. Note they also use it differently. And again, car insurers are not allowed to use credit scores to calculate premiums in California, Hawaii and Massachusetts.
They roll that FICO data into something that’s called a credit-based insurance score. It’s an insurer’s way of trying to determine who is more likely to file a claim. Like a FICO score, a higher credit-based score is good. It means an insurance company believes a driver is less likely to file a claim, thus they’ll see lower premiums. Credit Karma offers a free tool to obtain your credit-based car insurance score here, but you’ll need to have a Credit Karma account.
According to Nationwide, not in the study, it uses credit score factors such as payment history, delinquencies or late payments, length of credit history, along with types of credit, such as credit cards and loans. This is generally the information other insurers use as well.
Once you’re in, though, you’re in. In a 2018 Insurancequotes.com study, Mark McElroy, executive vice president of insurance business for TransUnion, says most insurers generally won’t use a credit score when it’s time for renewal. So if it’s changed for the worse, you’ll probably be ok.
How Credit Impacts Insurance Rates
So we know insurers use the data. But what does it mean for your pocketbook, really. Well, quite a lot actually. People with poor or no credit can pay double or even triple more for premiums. There are even notable differences between fair and excellent scores. They vary from insurer to insurer.
Overall, the Wallethub study found, that as you might suspect, the better your credit is, the lower your rate is. Researchers found that drivers with no credit pay 67% more for car insurance than people with excellent credit, on average. Even average credit means you’ll pay more than a quarter percent more than someone on the excellent credit list. An Insuranceqoutes.com study found drivers with average credit-based insurance scores pay 28% more than a driver with excellent credit.
Insure.com puts a specific credit rating number of it. It says those with lower credit scores under 600 are typically considered higher risk because they are more likely to file claims. Also it says people with lower credit scores may be asked to pay more of the policy up front.
So what state’s will bad credit hit you the most? A 2018 NerdWallet study found that poor credit had the biggest impact on premiums in Michigan, Kentucky and New Jersey. For example in Michigan, the annual price increase for drivers with poor credit is $5,571 or $464 a month. In Texas, it’s $1,759 and $147 a month.
So what if you’re credit is in tip-top shape? You’ll want to shop around to see how much of a discount you can get for your financial prowess. Wallethub’s study found that drivers with the best credit reap the most benefits from Farmers Insurance, where excellent credit can save you 54%. Over at State Farm and AllState it’s 44%, Progressive 43% and Geico doesn’t give much of a discount, rewarding drivers the least at 20%.
Improving Your Score
When it comes to improving your credit score – and thus your insurance-based credit score – FICO says it best. There is no quick fix.
- Pay your current bills and loans back on time. Set up payment reminders if you need to.
- Reduce the amount of debt you owe. Don’t open new credit accounts and move it around. While a couple of cards is typically ok, opening a bunch could hurt your score.
- Keep credit card balances low. VantageScore recommends your “credit utilization” rate not be than 30 percent of your maximum borrowing limit.
- Be aware the collections account will stay on your FICO score for 7 years.
- Note that in general having a credit card will improve your score since it shows some sort of credit history lenders can go on. It’s one way to initially build or rebuild your score.
Check out more FICO tips here.
Your Claim History
If you are interested in seeing your claim history, there is a national database where it can be found. It’s the LexisNexis C.L.U.E Auto database. LexisNexis says more than 99 percent of car insurers report claims to this database. For more information on it or how to access it head to the Consumer Federation of America or the LexisNexis website.
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