When it comes to taking out a mortgage, getting an auto loan, or opening a new credit card, most consumers know that their credit history plays a significant role. Your credit can be the deciding factor between a loan approval or denial, and a high or low interest rate.
But did you know credit also plays a role in how much you’ll pay for auto insurance? Credit Karma investigates more on how your credit impacts your auto insurance premiums.
What’s an Auto Insurance Score?
An auto insurance score is used by auto insurers in most states to predict your insurance risk and price your premiums up or down accordingly.
Auto insurance score models, similar to credit score models, plug your credit history information into a credit-based scoring formula. Just like lenders and issuers use your credit score to determine your creditworthiness, insurers use the credit-based auto insurance score, as well as your driving history, to determine how risky you are to insure.
Why Is My Insurance Affected by My Credit?
Studies have shown that credit behavior and the likelihood of an insurance claim are related. Generally speaking, consumers with good credit, such as on-time payment history, low debt, and stable credit management, are less likely to make a claim and thus be rewarded with lower rates. Vice versa, consumers with poor credit are more likely to make a claim and thus are likely to be expensive to insure.
According to the Insurance Information Institute, the average cost of a claim for a person with below-average credit is $918—53% higher than the average claim. On the other hand, the cost of an average claim from a person with an above-average credit score is $558—23% below the average claim.
Based on auto insurance scores, insurers are basically looking at how responsible you are with credit as an indication of how responsible you are in other aspects of life, such as responsibility with your car. While it’s not an exact science, your auto insurance score helps insurers asses how much they should charge you based on how risky you may be. (Curious about that process? Read more on the argument behind insurance scores.)
Should I Be Worried About My Credit?
Comparing auto insurance score models to credit score models is like comparing apples to oranges; while they are similar, they are certainly not the same. Having a 720 credit score doesn’t necessarily guarantee an equally great auto insurance score. These scoring models weigh aspects of your credit history differently, so it’s important to keep up with your auto insurance score as well as your credit score.
Credit Karma’s new Score Center now gives you your Transunion credit score, VantageScore, and your auto insurance score. It’s a great free resource to check and track your auto insurance score, plus learn more on how to improve your credit so you can save more on your auto insurance. The best strategy to improving your auto insurance score is to improve your overall credit health.
Starting off 2011 on the right financial foot means stepping up your credit game, so stay tuned with Credit Karma’s weekly LearnVest posts and check in at Credit Karma’s free Score Center to sharpen your credit management skills.