What Is Your Credit-Based Insurance Score?
This number is the crucial link between your FICO score and the cost of your monthly car insurance.
A higher score will help keep your premiums low, while a bad score may cause you to pay more for the same amount of cover.
- Credit-based insurance scores are calculated by FICO (Fair Isaac Corporation), the same organization that generates the regular credit score that lenders use when approving your mortgage, loan, and credit card applications
- These factors used to determine your score: payment history, amounts owing, length of credit history, new credit applications, and credit mix. These are the same items that FICO uses to calculate your regular credit score, but payment history counts 5% more and credit mix counts 5% less for your insurance score
Why Insurers Check Your Credit Score
There’s a simple reason why insurance companies have such a keen interest in your FICO numbers. They’re used to predict which customers are likely to default on their payments. Additionally, industry research has found that people with low credit scores may be riskier to insure.
- Even if you’ve never had an accident or missed a single insurance payment, you could end up paying a higher premium simply because of your credit score
- The good news is that raising your FICO score will help you secure lower monthly insurance costs and free up extra money to help you make all your debt repayments on time
How To Improve Your Score
The various factors that go into your credit-based insurance score can all be optimized to raise your numbers and help you save on your monthly premiums.
Let’s take a look at each one in more detail.
-Your payment history is the most important factor that FICO takes into consideration, and it counts a full 40% toward your insurance score.
- You can boost this factor by always making your debt repayments on time and ensuring that no counts are listed as late, delinquent, or, worst of all, charged off
- You’ll want to note the statement date and due date on all your accounts. Keep track of your payments or opt for an autopay option that’ll let you settle them by direct debit
-Outstanding debt, the total amount you owe your creditors, is the second-biggest factor in your score at 30%. The easiest way to reduce this amount is by paying down your credit card balances and keeping them low.
- Card balances push up your credit utilization (the percentage of your available balance that you’re currently using) and lower both your regular credit score and your insurance score
- Paying these balances down will give you a double boost and help you save money on fees and interest in the long run
-Credit history length, the amount of time you’ve had a specific credit account, makes up 15% of your score. Lenders and insurers like to see long-term borrowing with an excellent payment record. This tells them that you’re a reliable customer who is likely to pay your installments each month.
- You may want to keep your credit card accounts open even if you don’t use them that often. This’ll add to your credit history length score and also give you access to the rewards and other benefits associated with your card
-New credit applications contribute 10% to your credit-based insurance score. Applying for too much new credit within a short space of time can cause your numbers to drop.
- A flurry of new credit applications may give lenders and insurers the impression that you’re in financial trouble. This raises the likelihood that you’ll default on your insurance premiums
Your credit mix is the least important factor in your score but it still contributes 5% to the total.
If you don’t already have at least one loan and credit card on your credit profile you could improve your score by applying for new credit.
It may surprise you to know that your credit score can affect the insurance premium you pay. However, there are several things you can do to boost your score and lower your monthly car insurance costs.
Paying your accounts on time, maintaining low balances, keeping your accounts open and in good standing, and limiting your new credit applications are all excellent strategies to boost both your FICO score and your regular credit score.