Why is my car insurance score so low?

If your car insurance score is low, it could be a result of a (1) bad credit history, (2) poor driving record, or (3) multiple past car insurance claims.

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UPDATED: May 4, 2022

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Written By: Laura BerryReviewed By: Joel OhmanUPDATED: May 4, 2022Fact Checked

Here's what you need to know...

  • Statistics have shown that credit does play a role in how likely a policyholder is to file and this is why some states do use credit to determine rates
  • Whether or not insurance can be used in rate determination is dependent on the laws set by the State Department of Insurance
  • Instead of using your FICO score, insurance companies will use a credit-based insurance score that only uses some of the details that are found on a consumer credit report

Most consumers begin to realize that their credit score can essentially dictate their financial future when they hit 18.

It’s stressed that you need credit to secure an auto loan, to qualify for a mortgage, and even to get a good job, but not many parents and professors stress that your credit score can also affect your ability to find affordable car insurance.

Credit-based insurance scoring is becoming more of a common practice in the industry, but it isn’t used in all states or by all companies.

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Is it legal for car insurance companies to use your credit score to calculate rates?

Insurance companies must follow the rules that are set by the Federal government and by the State Department of Insurance when setting rates and underwriting policies.

Unfortunately, since auto insurance is an industry that’s typically regulated by the state and hardly ever regulated on a Federal level, some insurers are able to legally use credit and others aren’t.

Credit-based insurance scoring is a very popular way to rate policies, but some states do believe it’s an unfair discriminatory practice.

This is why insurance companies selling products in California, Massachusetts, and Hawaii officials all prohibit auto insurance companies from accessing credit information for insurance purposes.

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Do consumers have to be notified if their credit is being used?

If you were shocked to learn that your credit was even a risk factor for auto insurance, you should pay close attention to the documents you’re signing and the notifications you receive at policy inception.

You’ll be asked to give permission for the company to access your credit for a quote to be calculated. After this, you’ll receive a letter that explains how credit is used.

Is a credit score the same thing as a car insurance score?

Many assume that the credit score and the insurance score are two different names for the same thing. In actuality, they are similar but different.

Insurance scores are based off information that’s found on the policyholder’s credit file through one of the three credit reporting bureaus.

In addition to the relevant information that’s found on your credit, insurers will also use your past insurance history to assign a score to your policy.

Who calculates a car insurance score?

Today, there are two companies that offer insurance scoring services. These two companies are the Fair Isaac Corporation (FICO) and Choicepoint.

The numbers that are calculated by either company will be 3 digit numbers much like your credit score.

The numbers are highly predictive on how likely a household is to file a claim and how much future claims costs will add up to.

Combined with claims information provided by LexisNexis, insurers can get the picture as to who might be a good risk and who might not.

While the algorithms used for scoring is the same between the companies, sometimes they are different because of the reporting agencies used to gather the information.

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What information on the credit reports can be used by insurers?

Not everything filed on your credit report is fair game when insurers are reviewing it. Only some of the details will shed light on a household’s risk factor.

If you aren’t quite familiar with what’s used for your credit report, here’s a breakdown of what’s used:

What can’t be used to calculate an insurance score?

The use of credit scoring is limited when auto insurance companies are underwriting and rating a new or existing policy. This is because some of the details that are found in credit reports are believed to be irrelevant when it comes to assessing risk.

Here is personal information that companies and scoring can’t use:

  • Race and national origin
  • Gender and marital status
  • Religion
  • Location
  • Income
  • Employment history
  • Interest rates being charged
  • Inquiries on credit for employment

Do companies have to tell you your insurance score?

Under the federal Fair Credit Reporting Act, any user who is reviewing credit reports must send an Adverse Action Notification when their report leads to higher premiums or policy denial.

In this notification, the insurer must give you four different reasons as to why the policy premiums were negatively affected by credit.

The notice might not give your numerical score, but if rates have gone up because of credit this will go out. If you don’t get an Adverse Action Notice, you’ll probably just be told if your credit is in an average, good or excellent range.

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What is the common range for insurance scores?

The insurance scores calculated by the Fair Isaac Corporation range between 300 and 900. The scores that are issued by ChoicePoint range between 300 and 997.

It’s believed that scores above 700 are in the good range and scores above 800 are great. Some companies issue discounts at 700 and others won’t until a score reaches 800.

How can you improve your car insurance score?

If you want to improve your insurance score, the first step is to review your free credit report. Reporting errors is important, but if there aren’t errors, there are still ways to improve your score.

You can pay down balances on your cards and avoid filing small claims against your policy that you could pay on your own.

Credit is something that will follow you around throughout your entire life. If you don’t want to be hit with high-interest rates and high insurance premiums, you need to know how credit is used.

Once you find out how scores are calculated, you can start to compare rates. Use an online rate comparison tool to compare rates and then you can see how your credit can benefit or hinder you as you shop around.

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Editorial Guidelines: We are a free online resource for anyone interested in learning more about auto insurance. Our goal is to be an objective, third-party resource for everything auto insurance related. We update our site regularly, and all content is reviewed by auto insurance experts.

A former insurance producer, Laura understands that education is key when it comes to buying insurance. She has happily dedicated many hours to helping her clients understand how the insurance marketplace works so they can find the best car, home, and life insurance products for their needs.

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Written by Laura Berry
Former Insurance Agent Laura Berry

Joel Ohman is the CEO of a private equity backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Jo...

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Reviewed by Joel Ohman
Founder & CFP® Joel Ohman

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