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?

man looking at credit score on phone and laptop screen open behind it
REDPIXEL.PL / Shutterstock

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.

Simply add Capital One Shopping to your browser, and shop like normal. This free tool does the work for you.

Install Capital One Shopping

Why do insurance companies use your credit score?

Man showing couple something on a tablet
Africa Studio / Shutterstock

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

Close up of pile of credit cards
nevodka / Shutterstock

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.

It seems like a tricky time to get into real estate, and being a landlord isn't as passive as you think. Look at these low-stress options instead.

Read More

What you can do to get the best rates

Young woman sitting at table at cafe, using laptop
G-Stock Studio / Shutterstock

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 Smart Financial can search quotes from nearly 1 million possibly policies provided by the top carriers within minutes and 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.

Compare insurance quotes and save money

Did you know that you could be saving some serious money just by switching insurance companies?

It’s true. You could be paying way less for the same coverage. All you need to do is look for it.

But don’t waste your time hopping around to different insurance companies. Use a website called SmartFinancial to see all of your options at once.

SmartFinancial will provide you with a tailor-made list of possible policies from all major and most relevant insurance carriers.

About the Author

Sigrid Forberg

Sigrid Forberg

Reporter

Sigrid is a reporter with MoneyWise. Before joining the team, she worked for a B2B publication in the hardware and home improvement industry and ran an internal employee magazine for the federal government. As a graduate of the Carleton University Journalism program, she takes pride in telling informative, engaging and compelling stories.

What to Read Next

10 Causes of a 'Check Engine' Light

Find out what that light on the dash probably means -- and what it could cost you.

How to hire a home health care aide

Having a trustworthy helper can make all the difference. Take these steps to find one.

11 key auto insurance terms to understand

Car insurance policy quotes are written in a language that can seem convoluted. We translate it for you.

Is there such a thing as pregnancy insurance?

What to expect from your insurer when you're expecting.

Disclaimer

The content provided on MoneyWise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.