Yes, across most of the country, that three-digit number will play an important role in the rates you’ll pay, not just your car insurance but also for your home insurance. Certain details from your credit report will even influence your life insurance rate.

Read on to find out how auto insurers use your credit to assess your risk of filing a claim and what you can do to put your best (driving) foot forward.

In what states do insurers use credit information?

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In all but three states, insurance companies use a credit-based insurance score to calculate your premiums. So unless you live in California, Massachusetts or Hawaii, your credit score will be factored in.

(And sometimes Michigan: Last year, Michigan passed a law that banned the use of credit scores in auto insurance, but not credit information.)

Insurance companies don’t use a traditional FICO score, however. Instead, they have their own system called credit-based insurance scores.

Why do insurance companies use your credit score?

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Every state has laws that prevent insurers from setting rates that unfairly discriminate against individual drivers. So, in a bid to be objective, insurers use credit data — on the theory that the factors which lower your credit (outstanding debt, late payments, collections and bankruptcies) also increase your risk of filing an insurance claim.

And there’s research to back this up.

Actuarial studies have suggested that how a person manages their personal financial affairs is a good predictor of insurance claims, according to the Insurance Information Institute.

And the U.S. Federal Trade Commission (FTC) released a report to Congress in 2007 that found insurance scores correlate with both the number of filed claims and the total cost of those claims. This led the FTC to conclude that insurance scores allow for more accurate underwriting and risk pricing.

Your credit information therefore allows underwriters to make an informed assessment of your risk category without having to fall back on personal judgment, hunches and prejudice.

The difference between FICO and credit-based insurance scores

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FICO is one of the most well-known types of credit scoring. You’re assigned a number between 300 to 850 — and the higher your score, the better.

There are five factors that influence your FICO score:

  • Payment history.
  • Amounts owed.
  • Length of credit history.
  • Credit mix.
  • New credit.

With credit-based insurance scores, risk levels are assessed differently. You’re also assigned a three-digit number, but the range here is between 200 and 999.

Your regular credit score is factored in, along with past at-fault accidents and other claims, lapses in insurance coverage, and late or missed payments.

Every insurer will use a slightly different formula to calculate your score, so while it’s possible to predict your range, it can be hard to say for sure exactly which number an insurer is seeing when you apply for coverage.

What you can do to get the best rates

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So what does this all mean for you?

No matter what your credit score, you should always remember to shop around, regularly and rigorously, for the car insurance policy that meets your specifc needs at this moment. Research has shown that those who don’t compare quotes every six months could be overpaying by as much as $1,000 a year.

A tool like SmartFinancial can search quotes from over 200 insurance companies and, within minutes, find you the lowest prices available in your area.

Nevetheless, It’s important to regularly check your credit score. One error or misreporting can wreak havoc on your credit — and cause you to needlessly pay extra on your insurance premiums.

If your score is accurate, but still not great, you have some options. Credit monitoring, for example, can show results in as short a time period as a month.

Some other steps you can take include:

  • Make all your debt payments in full and on time.
  • Avo using all the credit available to you.
  • Keep accounts open to build your history.
  • Mix up your accounts: Have a few different credit cards and secured loans.
  • Avoid applying for new credit cards often.

And, finally, avoid making claims whenever you can. Sometimes there’s nothing you can do to prevent them, but be sure to follow the rules of the road and take care of your car to prevent being in an at-fault accident as much as possible.

With your credit score in check and your claims capped, insurance companies will soon be rolling out the red carpet for you — or at least the stain- and water-resistant automotive carpet.

About the Author

Sigrid Forberg

Sigrid Forberg

Staff Writer

Sigrid is a staff writer with MoneyWise. A graduate of Carleton University's journalism program, she spent the better part of the last six years writing about business and retail. In her spare time, she enjoys reading, baking and riding her bicycle.

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