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Is Your Credit Score Affecting Insurance Rates?

last updated March 10, 2015 by

Our driving record constitutes a large part of our insurance rates. But things unrelated to driving, like spending habits, can be used to determine insurance rates also — and may even determine whether you qualify for coverage at all. Your credit score is one of the factors.

Insurers use what they call an insurance score as a risk predictor. When determining needed coverage and the rates to use. Insurers don’t look at your regular credit scores, such as the familiar FICO score. Instead, they look at parts of your credit report — how many accounts are past due and possible bankruptcies — to compile what’s called a credit-based insurance score. This is not your credit score, but an score used specifically to determine risk for insurance companies whether to offer coverage. It doesn’t’ seem like credit habits would relate to driving risk, but insurance companies are seeing correlations between risky money habits and taking risks on the road.tesla-model-s_100413300_l

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For most drivers insurance score does not change your rate, but might improve it! For example, a 2013 study by the Arkansas Insurance Department found that 87% of consumers received cheaper car insurance rates, or saw no change, when companies considered their insurance scores.

Insurance scores are controversial. Even though insurance scores are used widely, they still garner criticism. For years, consumers have complained that there is no connection between credit score and driving skill or risk, and that the use of insurance scores is unfair. Job emergencies and medical losses, for example, both have disastrous effects on credit even for responsible consumers, but do not cause accidents on the road. There are instances where campaigns against insurance scoring have been successful. Several states, including Hawaii and Massachusetts, outlaw or severely restrict the practice.

What can you do if your stuck with credit-based insurance scoring? Build and maintain a strong credit history. Improving your credit history positively takes time, here are some steps to take now: Pay your bills when they’re due, use all extra money to pay down the debt you do have. Check your credit reports for accuracy. You might ask your credit card issuers, if you have any, for a higher credit limit or pay your credit card bills bi-monthly. These will lower your credit utilization ratio — the percentage of your available credit that you’re using, thus making you look like a better bet for both lenders and insurance companies.